1. September 14, 2004 1 Growth and Development of Cities: Week 4. Urban Economy URBS 310

2. September 14, 20042 Urban Growth (O’Sullivan) Comparative advantage Scale Economies in Transportation and Trading Cities Internal scale economices Agglomerative economies

3. September 14, 20043 Comparative Advantage Trade between regions become advantageous. Trade causes development of cities. Determines whether trade is beneficial or not. Principle of opportunity cost.

4. September 14, 20044 Comparative Advantage Suppose that East and West agree to exchange 2 yards of cloth for one bushel of wheat.

5. September 14, 20045 Comparative Advantage The net gain of the West from trade is one bushel of wheat.

6. September 14, 20046 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.

7. September 14, 20047 Internal Scale Economies A reduction in a company’s average costs of production as output increases.

8. September 14, 20048 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.

9. September 14, 20049 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.

10. September 14, 200410 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)

11. September 14, 200411 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.

12. September 14, 200412 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 ”.

13. September 14, 200413 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

14. September 14, 200414 Judgmental Approach Produces forecasts by polling a panel of experts (Delphi) Used in conjunction with one of technical approaches

15. September 14, 200415 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

16. September 14, 200416 Ratio-Share Techniques Shift-Share Analysis: – 1) the national growth component – 2) national industry shift component – 3) the competitive shift component

17. September 14, 200417 Ratio-Share Techniques Shift-Share Analysis: – 1) the national growth component (N) + – 2) national industry shift component (M) – 3) the competitive shift component (S)

18. September 14, 200418 Ratio-Share Techniques Growth of Movie Industry of LA, 1990-2000 (M LA9000 ): – 1) N = M LA90 (T nation00 / T nation90 – 1) + – 2) M = M LA90 (M nation00 / M nation90 – T nation00 / T nation90 ) + – 3) S = M LA90 (M LA00 / M LA90 – M nation00 / M nation90 )

19. September 14, 200419 Ratio-Share Techniques Growth of Movie Industry of LA, 1990-2000 (M LA9000 ): – 1) N = M LA90 (T nation00 / T nation90 – 1) + – 2) M = M LA90 (M nation00 / M nation90 – T nation00 / T nation90 ) + – 3) S = M LA90 (M LA00 / M LA90 – M nation00 / M nation90 )

20. September 14, 200420 Ratio-Share Techniques Quiz 1: Estimate three components of 1979-89 growth of local computers sector using shift-share analysis.

21. September 14, 200421 Ratio-Share Techniques Projection of Movie Industry of LA, 2000-2010 (M LA0010 ): – N = M LA00 (M nation10 / M nation00 ) + – S = M LA00 (M LA00 / M LA90 – M nation00 / M nation90 )

22. September 14, 200422 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

23. September 14, 200423 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.

24. September 14, 200424 Component Methods Base Multiplier: Ratio of the total local employment in year t, to the total basic employment in that year. BM = e t T / b t T 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?

25. September 14, 200425 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 –

26. September 14, 200426 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 LQ i = (e t i /e t T ) / (E t i /E t T ), where e t i = regional employment in industry i in year t, e t T = total regional employment in year t, E t i = national employment in industry i in year t, E t T = total national employment in year t

27. September 14, 200427 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

28. September 14, 200428 Location Quotient Quiz 3: Compute the location quotient for employment in agriculture. Interpret the results. Employment in Agriculture Total Employment Local150260 Nation10,00024,000

29. September 14, 200429 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.

30. September 14, 200430 Others Joint Economic-Population Approach Normative Economic Projection: based on goals and objectives

31. September 14, 200431 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)

32. September 14, 200432 Optional Assignment 3 (Due on 9/28) 1. Estimate three components of 1979-89 growth of local computers sector using shift-share analysis.

33. September 14, 200433 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?

34. September 14, 200434 Optional Assignment 3 (Due on 9/28) 3. Compute the location quotient for employment in agriculture. Interpret the results. Employment in Agriculture Total Employment Local150260 Nation10,00024,000