Group 2 ECONOMIC BASE 2

THE
ECONOMIC BASE
ECONOMIC-BASE CONCEPTS
The concept of the economic base shows
how settlements are affected by changes
in the economic conditions.
Economic-base concepts originated with
the need to predict the effects of new
economic activity on cities and regions.
Example:
Say a new plant is located in our city. It directly
employs a certain number of people. In a
market economy these employees depend on
others to provide food, housing, clothing,
education, protection and other requirements of
the good life.
• Economic-base models focus on the
demand side of the economy. They
ignore the supply side, or the
productive nature of investment, and
are thus short- run in approach.
The
Economic Base
Theory
Introduction
•Introduced by the
economic geographer
John Alexander in the
mid-1950s
Alexander (1954) mentioned four notions
regarding the applicability of this areas :
1. The concept provides a view of economic ties
which bind a city other areas.
2. It permits the most satisfactory classification
of cities in terms of regional functions. Cities
are more accurately distinguished by their
basic economy than by their total economy.
The basic express a city’s service to its region.
Alexander (1954) mentioned four notions
regarding the applicability of this areas :
3. The basic-non basic concept provides a
new ratio (“B/N” ratio) which may have
significance in differentiating the types.
4. Provision of the B/N ratio also enables
a new classification for individual
economic endeavors.
Introduction
• The Economic base theory tells us that the
rate of economic growth of a region is
determined by the amount of the increase
in exports from the region, meaning that
through exporting more goods or
preventing fewer imports can help
increase the economic growth of a region.
Introduction cont..
• Economic base theory is the notion that a region’s
economy is divided Into two sectors: the basic and non-
basic sectors and all the economic activities are based
on base and non-base activities.
• All those activities that brings money from outside of
the region are called Basic activities; whereas all other
economic activities in the region are called Non-Basic
activities.
Basic Sector
Part of the employed population of an urban
unit is engaged in either the production of
goods or in the performance of services for
areas and people outside that urban area. They
include workers engaged in “export” activities
whose efforts result in money flowing into the
community.
Basic Sector
Also known as Export Sector. Consists of firms and
parts of firms whose economic activity is dependent
upon factors external to the local economy i.e.
export markets external to the country and region.
Examples:
Manufacturing, agriculture, forestry, fishing,
mining, national govt, hotels/lodging etc.
Non-basic Sector
Other workers support themselves by producing goods for
residents of the urban unit itself. Their efforts, necessary to
the well-being and the successful operation of the
settlement, do not generate new money for it. These people
are responsible for the internal functioning of the urban
unit. They are crucial to the continued operation of its
stores, professional offices, city government, local transit,
and school systems.
Non-Basic Sector
• Also known as Local Sector. Consists of firms and
parts of firms whose economic activity is
dependent largely on local economic conditions
• Examples: retail trade, wholesale trade, local

government, services, construction, transportation,
communication.
The Economic Base
Theory Assumptions
Economic base theory Assumptions
• Economic base theory assumes that the export
sector is the primary cause of local economic
growth.
• Economic base theory assumes that all local
economic activities can be assigned to either the
basic or non-basic sector i.e.. any economic
activity is base or non-base (export or local).
• Variation in basic employment structure
among urban areas characterize the
specific functional role played by
individual cities.
• Most cities perform many export
functions, and the larger the urban unit,
the more multifunctional it becomes.
Nonetheless, even in cities with a
diversified economic base, one or a very
small number of export activities tends to
dominate the structure of the community
and to identity its operational purpose
within a system of cities.
Economic Base Theory
• Economic base theory has several advantages as
an explanation for how the economy works,
and how a region can generate prosperity, and it
is easy to explain in a nontechnical way.
• Regional prosperity is achieved by building up
the base through exporting more goods from the
base or preventing fewer imports.
The Multiplier Effect
The term multiplier effect implies the addition
of non-basic workers and dependents to a
settlement’s total employment and population
as a supplement of new basic employment; the
size of the effect is determined by the
community’s basic/non-basic ratio.
A generalized representation of the proportion of the workforce engage in basic
and non-basic activities by settlement size. As settlements become larger, a greater
proportion on the workforce is employed in non-basic activities. Larger centers
are therefore more self-contained.
• The changing numerical relationships
shown in the graph are understandable
when we consider how settlements add
functions and grow in population.
• A new industry selling services to other
communities requires new workers, who
thus increase the basic workforce.
• These new employees, in turn,
demand certain goods and services,
such as clothing, food, and medical
assistance, which are provided
locally by the non-basic workers.
• Those who perform such services must
themselves have services available to them.
For example a grocery clerk must also buy
groceries.
• The more non-basic workers an urban area
has, the more non-basic workers are needed to
support them, and the application of the
multiplier effect becomes obvious.
• The growth of cities may be self-generating --- “ circular
and cumulative”--- in a way related not to development
of industries that specialize in the production of material
objects for export, like automobiles and paper products,
but to the attraction of what would be classified as
service industry.
• Banking and legal services, a sizable market, a
diversified labor force, extensive public services, and the
like may generate additions to the labor force not basic
by definition, but non-basic.
• In recent years, service industries
have developed to the point where
new service industries serve the
older service industries.
For example, computer systems firms
aid banks on developing more
efficient computer-driven banking
• In much the same way as settlements grow
in size and complexity, so do they decline.
When the demand for the goods and
services of an urban unit falls, there is an
obvious need for fewer workers, and thus
both the basic and the non-basic
components of a settlement system are
affected.
The
Base
Multiplier
The Base Multiplier
• It is method for estimating the impact of the basic sector upon
the local economy.
• FORMULA:
Base multiplier = Total employment
Base employment
• E.g. Basic jobs in a Region (agriculture + tourism + mining
etc.) are 100 and non basic jobs (retail + local business etc.) are
200 so the Total Jobs Basic + non Basic = 300
The Base Multiplier
• Adding to the formula
• Formula:
Base multiplier = 300
100
Base multiplier =
3
• So that means if a firm added 10 basic jobs the whole
economy would grow by 30 jobs of that region.
Determination of Base
sector
Direct Method
Conducted through a survey directly to businesses where
they market their products and where they buy raw
materials.
Indirect Method
Establish a base and non-base activities based on the
assumption that you define yourself.
Mixed Method
By survey and through assumption.
Determination of Base
•sector
The location quotient is probably responsible for the long life
and continuing popularity and use of economic-base
multipliers. These quotients provide a compelling and attractive
method for estimating export employment (or income).
Location Quotient method LQ = (ei/e)

(Ei/E)
Where ei = local employment in industry i
e= Total local employment
Ei = National employment in industry i
E= Total National employment
• Assuming that the national economy is self-
sufficient, then a location quotient greater than one
means that the area economy has more than enough
employment in industry i to supply the region with
its product. And a quotient less than one suggests
that the area is deficient in industry i and must
import its product if the area is to maintain normal
consumption patterns.
Location Quotient method
• E.g. Industry i has 100 jobs on a local level and total
local jobs are 1,000 and industry i has 250 jobs on a
national level and total national jobs are 10,000 so
LQ = (100/1,000)
=10%
(250/10,000)=2.
5%
LQ = 4
Location Quotient method
•To know the number of basic jobs in industry i we
use Formula
(1-1 / LQ) x Total jobs of Industry i in a
region(e.g. 100)
• Adding values = (1- 1/4) x 100
= 0.75 x 100
= 75
• Means that the industry i have 75 Basic jobs and 25 non
Basic jobs.
• Surplus or export employment in industry i
can be computed by the formula
EXi = (1 - 1/LQi)*ei , LQi > 1
= (1- 1/4) x 100
= 0.75 x 100
= 75
• which is easily shown to be the difference
between actual industry employment in the
area and the "necessary" employment in the
area.
• In fact, then, excess employment can be
computed without reference to location
quotients through this reduction of the
formula:
EXi = ei - (Ei/E)*e
= 100 - (250/10,000)*1,000
= 100 - (0.025)*1,000
= 100 - 25
= 75
• It is convenient to retain the initial formula as a
reminder of the logic, and to compute location
quotients as reminders of the strengths of exporting
industries.
• Now it is easy to estimate export employment for
each industry in the area and to sum these estimates
to yield a value for export employment for the area
in some particular year.
• With this number and total employment,
an average multiplier for the area can be
computed.
• With a set of these values over 10-20
years, the more acceptable marginal
multiplier can be estimated by simple
regression.
Group 2
Rey Francis S.A. Estay BSED 1B-Soc.Sci
Ryan Jerome V. Diwata BSED 1B-Soc.Sci
Joan B. Cellona BSED 1B-Soc.Sci

Group 2 ECONOMIC BASE 2

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THE

• Examples: retail trade, wholesale trade, local

Location Quotient method LQ = (ei/e)

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