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Chapter 6 Structural Interrelations in the Local Economy

Chapter 6 Structural Interrelations in the Local Economy. Charles M. Tiebout The Community Economic Base Study. Economic Base & The Settlement System. Exports. The Region. Imports. Local Multiplier Effects. The Time Factor in Community Studies. Static vs. dynamic perspectives

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Chapter 6 Structural Interrelations in the Local Economy

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  1. Chapter 6 Structural Interrelations in the Local Economy Charles M. Tiebout The Community Economic Base Study

  2. Economic Base & The Settlement System Exports The Region Imports Local Multiplier Effects

  3. The Time Factor in Community Studies • Static vs. dynamic perspectives • Short-run analysis vs. long-run analysis • The simple base model E = (1/1-alpha)EX • Assumptions: short-run analysis: 3 sectors: exports, local investment, local consumption • In the short-run, exports and local investment are “given” or fixed (time horizon : up to 2 years)

  4. The Local Consumption Sector – Short-run analysis • Resident spending on local consumption • Income earned by the local sales $ • The multiplier process for local consumption Income Change = (Change in Export + Investment Income) x (1/1-apcL x income/$ local consumption sales) Example: $1 x (1/1-.5*.4) = 1/(1-.2) = $1.25

  5. Assumptions: Long Run Analysis • Time horizon greater than 2 years • As exports change (grow), this leads to greater investment to support growth in output • Thus, investment becomes endogenous to the multiplier calculation: Income change = Change in Export Income x 1/(1-apcL x income/$ local consumption sales + apiL x income/$ local investment sales) Example: $1 x (1/(1-.5*.4+.2*.5)) = (1/(1-.2-.1) = 1/.7 = $1.43

  6. Local Consumption Sector Issues • (1) How closely related is local consumption to total local income • (2) Local consumption to total income ratios go up, go down, or we don’t know • (3) Empirical evidence proves these ratios are unstable • (4) The model does not allow for import substitution • (5) The ratio varies among communities

  7. Washington I/O Table ($ billions)Net industrial exports are roughly offset by imports to industries and categories of final demand (households, investment, and state and local governments) Imports to Consumption & Other F.D. 49.1 Industrial Imports Net Industrial Exports: 155.9-110.9 = 45.0 Industrial Exports

  8. What evidence to we have on local income to total income

  9. How has local consumption changed as income levels have changed?

  10. Unstable ratios?: Output Multiplier Correlations Correlation weakens with time

  11. Import Substitution? Mix of Overall PCE

  12. The behavior of other sectors • Local housing investment • Business investment • Local government investment • Local government current operations

  13. An Expanded Model • Expanded terms in the short-run model: private exports, exports to the federal government, local business investment, local housing investment, local government investment, local government operations; Entering the multiplier: apcL x income per $ of local consumption sales • Expanded terms in the long run model: exports private + to the federal government. Entering the multiplier: apcL x income per $ of local consumption sales, local business investment, local housing investment, local government investment, local government operations

  14. What are “Basic” Sectors? • “Basic industries are those whose level of activity is not clearly tied to the level of economic activity in the local community.” • In the short-run this can be activities except exports • In the long-run, exports are the fundamental force for regional growth/change • BUT: growth can come without expansion of exports: “the world has growth without exports to outer space”. Via productivity change that leads to growth in per capita income

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