# Economic Base Theory Review

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"Economic Base Theory Review"

```					         Economic Base Theory Review

Project Sponsored by the U.S. Economic Development Administration
&
Western Carolina University’s
Institute for the Economy and the Future
Economic Base Theory: Definitions

• Basic Industry – Those industries that produce goods and
services ultimately sold to consumers outside the region
• Non-basic Industry – Those industries that produce goods
and services that are consumed locally.
• Multiplier – Ratio of total economic activity to basic
economic activity.
Economic Base Theory: Foundation

• A region’s export industries are it’s economic foundation.
And all other industries thrive by servicing the export
industries and one another.
• A change in the basic sector will lead automatically to a
change in the same direction in the non-basic sector.
• The ratio of non-basic to basic activity is reasonably stable
over the long term.
Economic Base Theory: Geography Matters!

As you enlarge the region under study…..

Multi-
County            City                            State
County

….what is basic and what is non-basic can change!
Economic Base Theory: Multipliers

• If a region can increase the level of basic employment, it can
increase total employment by that amount times the multiplier.

(change in basic employment) x (multiplier) = (change in total
employment)

Multiplier = Change in Total Employment
Change in Basic Employment
Economic Base Theory: Multipliers
Try this example: Determine the multiplier for Sunnyville based on
the data below describing basic and non-basic employment figures.

Industry Type                       1990                   2000
Basic                               1000                    2000
Non-Basic                            600                    1200
Total                               1600                    3200
Multiplier:                                                  ?
1.6

Using the formula on the previous slide, the multiplier is 1.6
Economic Base Theory

Three main approaches:
• Judgmental Approach
• Survey Approach
• Minimum Requirement Approach
Economic Base Theory: Judgmental Approach

• Analyst decides which industries are basic and which are non-
basic
• Easy to do for some industries, difficult for others
• Example:
― Groceries and dentists – are virtually always local industries
― Industries like printing companies are much harder to
estimate: such industries could be either producing local goods
or non-local goods.
In this case, the question becomes: are they producing local paper
or encyclopedias that are shipped to larger region?
Economic Base Theory: Judgmental Approach

• Easy to do from published data
• Title alone highlights the primary problem – much of
analysis is dictated by an analysts’ judgment rather than
hard data
• As a result, conclusions from this type of analysis can vary
widely from analyst to analyst depending on how they
define basic and non-basic industries
Economic Base Theory: Survey Approach

• To utilize a survey to estimate the economic base of your
region:
― Conduct a sample survey to measure the size of the flow of
resources into and out of the region in question.
― Determine the share of output flowing outside the region for
each firm.
― Use these shares with company employment (after weighting)
and sum across companies.
Economic Base Theory: Survey Approach

• Derived from actual firm-specific data in a given region.
• Higher cost to administer than judgmental approach
• Possibility of sampling error if survey is not administered
properly
• May be difficult to get participation
Economic Base Theory: Minimum Requirements
Approach

• A variation on the Location Quotient approach (see tutorial on
location quotient)
• Uses the minimum industry employment ration (Ei / E ) among
all regions instead of the U.S. industry ratio
• Using the minimum to define local demand in all regions
eliminates problem of “cross hauling”
― “Cross-hauling” refers to simultaneous exporting and importing of a
product in a given region
Economic Base Theory: Minimum Requirements
Approach