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Fanning (2005), Ch 6 Economic Base Analysis

This article discusses the concept of economic base and its multiplier effect on local employment. It explains the importance of export activities and secondary activities in a city's economy. The article also covers the limitations of location quotients and the supply factors affecting a community's economic base.

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Fanning (2005), Ch 6 Economic Base Analysis

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  1. Fanning (2005), Ch 6Economic Base Analysis Interpreting Local Employment Numbers

  2. What is the Economic Base? • Economic Base: Activities that bring income into a city • Export activities: Products or services provided to the outside world (most manufacturing; higher education and research, advanced health care) • Activities that attract money (retirement, tourism) • Secondary (Local) Activities: Activities that recirculate income in a city (local government, local merchants and services)

  3. Economic Base Multiplier • The idea: As goes the base, so goesthe city. One extra job in the basic sector may cause 3 extra non-basic jobs. • Multiplier effect: Base income is respent, producing additional income

  4. $ $ $$$$$$ Savings $$ $ $$$ $$$ $ $ The Economic Base brings money In • 5. Total community income • is the sum of export dollars • plus respent dollars 1. “Exports” bring dollars into the community 2. Most is respent on local goods and services 4. Some “leaks” into savings $$$$ 3. Some “leaks”through outside expenditures

  5. The Economic Base Multiplier • The multiplier is total employment divided by basic employment. • I.e., divide total employment into basic and nonbasic: T = B + NB • The multiplier: k= T/B. E.g., k=3.0 • Estimate future growth in basic employment = cB. E.g., 5,000 new workers • Then est. growth in total emp = kxcB • E.g., est. cT = 15,000 = 3.0x5,000.

  6. Examples of Basic Employment • Mining and extractive industries – oil in Houston • Manufacturing – cars in Detroit • Federal government – military bases in Norfolk. • State and local government – state university or hospital • Retail & financial services that attract customers – major mall in a rural area.

  7. Nonbasic (“Service”) Employment • Local professionals – attorneys, doctors, real estate brokers, appraisers, lenders • Most retailing – gas stations, grocery stores, etc. • Local construction workers • Local government workers – school teachers, city hospital employees, etc.

  8. Obtain employment data • Quick Indicators • USA Counties in Profile http://www.stats.indiana.edu/uspr/a/us_profile_frame.html • See next slide for how to use Census data for EB analysis: • U.S. Census Detailed Tables http://www.census.gov

  9. Location Quotient an Indicatorof Economic Base • Compute the percentage of total employment in a given industry • Example: Suppose education is 20% • Compute the same percentage for the national economy • Suppose education in the national economy is 9% • Compute the ratio of local to national percentage: • Location quotient = 20% ÷ 9% = 2.22 • Interpretation: Local economy has 2.22 times the normal education employment; excess is export employment

  10. Limitations of Location Quotients (LQ’s) • They assume that: • Consumption patterns are constant from one local (e.g., metropolitan) area to another. • Labor productivity is the same in all metro areas. • Each industry produces a single homogeneous good. • The net result of these assumptions is that location quotients usually underestimate basic employment. • However, the LQ method is simple and data are readily available.

  11. Supply Factors Affecting a Community Economic Base • Labor force characteristics • Special skills and experience • Education level • Unionization • Work ethic • Other? • Quality of life • Leadership • Financial support • Government support (subsidies, land use regulation)

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