ECONOMIC DEVELOPMENT PLANNING

TOPICS Economic base model The multiplier effect Assumption Approach The location quotient methodology The shift and share methodology Input-output

A SYSTEM MODEL OF ECONOMIC DEVELOPMENT LABOR LAND CAPITAL JOBS WEALTH G & S Capital, goods and labor Urban Planning JOBS WEALTH

BASIC ASSUMPTIONS Exports to the rest of the world are the engine of growth of the local economy and these are considered the economic base of the system. Imports from the rest of the world to the local economy represent leakages from the system. The multiplier effect of expenditures at the local level is what makes the economic system work.

THE MULTIPLIER EFFECT ROUNDCONSUMPTIONSAVINGS (40%)INCOME GENERATED …2…3 TOTAL

THE MULTIPLIER b=marginal propensity to consume If savings is.4 then b=.6 therefore m=2.5 Which means that for each dollar coming into the economy, 2.5 dollars are generated of income

THE MPC AND THE MULTIPLIER MPCMULTIPLIER

THE LABOR SIDE OF THE MULTIPLIER TOTAL EMPLOYMENT = BASIC + NON BASIC BASIC IS REPRESENTED BY FIRMS EXPORTING GOODS PLUS GOVERNMENT THE NONBASIC IS REPRESENTED BY FIRMS SERVING THE LOCAL MARKET THEN THE BASE MULTIPLIER IS THE RATIO OF THE TOTAL EMPLOYMENT TO THE BASIC EMPLOYMENT

BASIC? NON BASIC? The economic base model divides the economy into basic and non basic employment. How do we identify and differentiate between basic and non basic employment? The assumption, the location quotient, and shift and share are widely used methods to identify and differentiate between the basic and non basic employment

THE BASIC ASSUMPTION METHOD We start by classifying industries that most likely will be engaged in “exports” to the outside world and we assume this to be the basic employment Basic employment will be those such as manufacturing, mining, agriculture and federal and state government.

LIMITATIONS OF THE BASIC ASSUMPTION METHODOLOGY The way the basic sectors and non basic sectors are identified is very subjective. It is safe to think that at least some proportion of the non basic sector is produced for consumption outside the local economy. Based on the above limitations we need a better method.

THE LOCATION QUOTIENT (LQ) e= local employment i= industry i t=time T=total employment E=National or State

THE LOCATION QUOTIENT (LQ) The numerator in the LQ is the percentage of employment of industry i with respect to the total local economy The denominator in the LQ represents the percentage of employment of industry i with respect to the reference unit (National or State) Then if the LQ is less than 1 it means that it is a non basic sector but if LQ is greater than 1 we counted it as basic employment.

CONSTANT SHARE ei=local employment industry i Ei= employment industry i reference region t=base time t’= t+1 Ri= rate of growth reference region

CONSTANT SHARE LIMITATIONS It assumes that the rate of growth of the local economy will be the same as the reference region The above is a limitation of the method because we know that often the local economy and the reference region move at a different pace. Therefore it is important to capture the differences (S) of the local and reference region.

SHIFT & SHARE S = differential between local and reference region

INPUT-OUTPUT

DIRECT COEFFICIENTS AgricultureManufacture Agriculture Manufacture Households Direct inputs BUYER SELLERSSELLERS