Growth and Development of Cities: Week 4. Urban Economy

Growth and Development of Cities: Week 4. Urban Economy URBS 310

Urban Growth (O’Sullivan) • Comparative advantage • Scale Economies in Transportation and Trading Cities • Internal scale economices • Agglomerative economies

Comparative Advantage • Trade between regions become advantageous. Trade causes development of cities. • Determines whether trade is beneficial or not. • Principle of opportunity cost.

Comparative Advantage • Suppose that East and West agree to exchange 2 yards of cloth for one bushel of wheat.

Comparative Advantage • The net gain of the West from trade is one bushel of wheat.

Scale Economies in Transportation • The cost per unit per mile decreases as the volume transported increases. So it is cheaper to transport wheat and cloth in bulk.

Internal Scale Economies • A reduction in a company’s average costs of production as output increases.

Agglomerative Economies • Why are some cities large? • By locating close to one another, firms can produce at a lower cost. (positive externality in production: the produdction cost of a particular firm decreases as the production of other firms incraeses). • Two types of agglomerative exonomies.

Localization Economies • The production cost of a particular firm decreases as “industrywide output” increases • Three sources • If there are scale economies in the production of an intermediate good, firms share a supplier of an intermediate input and form a cluster around the input supplier.

Localization Economies • Three sources • If output per firm varies from year to year, a cluster of firms facilitates the transfer of workers. (labor market pooling) • A cluster of firms improves communication, rapid exchange of information, and the diffusion of innovations (knowledge spillovers)

Urbanization Economies • The produdction cost of a particular firm decreases as “total output of the urban area” increases. • Result from the sharing of input suppliers (business services & public services), labor-market economies, and communication economies.

Globalization and Urban Growth • General Agreement on Trade and Tariffs (GATT)… reduce trade barriers (60% in 30s, 5% in 70s). • Major effect: manufacturing. Side effect is the weakening of labor unions. • What about services? Programming work in India, U.S. hospitals having medical transcription done in India. Insurance claims processing would be candidates for “outsourcing”, “offshoring”.

Urban Economic Analysis: Approaches • Judgmental Approach • Extrapolation of Trends • Ratio-Share • Component Techniques (Economic Base, Input-Output, Regression Models, Econometrric Models) • Joint Economic-Population Projections • Normative Economic Projections

Judgmental Approach • Produces forecasts by polling a panel of experts (Delphi) • Used in conjunction with one of technical approaches

Ratio-Share Techniques • The ratio, step-down, approach is used for two reasons: 1) dependence of local economies on the national and international economy increases 2) national or large area projections are available

Ratio-Share Techniques • Shift-Share Analysis: • 1) the national growth component • 2) national industry shift component • 3) the competitive shift component

Ratio-Share Techniques • Shift-Share Analysis: • 1) the national growth component (N) + • 2) national industry shift component (M) • 3) the competitive shift component (S)

Ratio-Share Techniques • Growth of Movie Industry of LA, 1990-2000 (MLA9000): • 1) N = MLA90 (Tnation00 / Tnation90 – 1) + • 2) M = MLA90 (Mnation00 / Mnation90 – Tnation00 / Tnation90 ) + • 3) S = MLA90(MLA00 / MLA90 – Mnation00 / Mnation90 )

Ratio-Share Techniques • Quiz 1: Estimate three components of 1979-89 growth of local computers sector using shift-share analysis.

Ratio-Share Techniques • Projection of Movie Industry of LA, 2000-2010 (MLA0010): • N = MLA00 (Mnation10 / Mnation00) + • S = MLA00(MLA00 / MLA90 – Mnation00 / Mnation90 )

Ratio-Share Techniques • Assessment • Conceptually and computationally straightforward, easily accessible data, fast and reasonably accurate projections • Instability in the regional (local) competitive component. • The simpler constant shift-share model seems acceptable in many cases. Appropriate for long term baseline forecasts

Component Methods • Economi-Base Analysis • Basic Sector: entirely dependent on factors external to local economy. Manufacturing firms, mining, federal and state governments. • Non-basic Sector (Population Serving Jobs):dependent on local economic conditions. Drycleaners, restaurants, and drug stores. Economic base technique assumes that all local economic activities can be identified as basic or non-basic.

Component Methods • Base Multiplier: Ratio of the total local employment in year t, to the total basic employment in that year. BM = etT/ btT • Quiz 2. • Total local employment: 15,000 and Total base employment: 10,000. What is the base multiplier? • If the base employment is projected to be 18,000, what is the projected total local employment, given the previous base multiplier? • Stability or Trending?

How to Determine Basic Employment • Assumption • Simplest • Assumptions • Location Quotient • Compare the local economy to regional/national economy. Measure the relative specialization of the region in selected industry sectors. • Minimum Requirements • Compare the local economy with the economy of a sample of similarly sized regions

Location Quotient • Developed by Hildebrand and Mace (1950) • Widely used and Widely criticized • Ratio of an industry’s share of the local economy to the industry’s share of the national economy LQi = (eti /etT ) / (Eti /EtT ), whereeti = regional employment in industry i in year t, etT = total regional employment in year t, Eti = national employment in industry i in year t, EtT = total national employment in year t

Location Quotient • LQ > 1: the region is more specialized than the nation in the agriculture • LQ < 1: the region is less specialized than the nation in the agriculture • LQ = 1: the region and the nation specialize to an equal degree in agriculture

Location Quotient • Quiz 3: Compute the location quotient for employment in agriculture. Interpret the results.

Input-Output • Wassily Leontief (1936,1951). Tracks the intricate web of production linkages among different industries in the region. • Suppliers • Intermediate suppliers: purchase inputs for processing into the outputs they supply • Primary suppliers: do not need to purchase inputs to make what they supply • Purchasers • Intermediate purchasers: buy the outputs of suppliers for use as inputs for further processing • Final purchasers: buy the outputs of suppliers in their final form and for final use.

Others • Joint Economic-Population Approach • Normative Economic Projection: based on goals and objectives

Sources of Data • Census Bureau (Dept. of Commerce) • Bureau of Labor Statistics ( Dept. of Labor) • Bureau of Economic Analysis (Dept. of Commerce) • Employment Development Department ( California State)

Optional Assignment 3(Due on 9/28) 1. Estimate three components of 1979-89 growth of local computers sector using shift-share analysis.

Optional Assignment 3(Due on 9/28) 2. • Total local employment: 15,000 and Total base employment: 10,000. What is the base multiplier? • If the base employment is projected to be 18,000, what is the projected total local employment, given the previous base multiplier?

Optional Assignment 3(Due on 9/28) 3. Compute the location quotient for employment in agriculture. Interpret the results.

Growth and Development of Cities: Week 4. Urban Economy