"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 Advantages • Easy to do from published data Disadvantages • 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 Advantages • Derived from actual firm-specific data in a given region. Disadvantages • 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 Advantages • Easy to compute like the Location Quotient Approach Disadvantages • Still suffers form the same problems as Location Quotient Approach (except for the cross hauling assumption)