San José State University
Department of Economics
Thayer Watkins
Silicon Valley
& Tornado Alley

The Economic Base Model

Some industries supply markets which are outside of the region. These industries are crucial to the local economy and are called the economic base of the region. This material covers the economic base model of a region and the methodology of regional income and employment multipliers. There are dynamic aspects as well as static aspects of the model.

An investigation of the economic bases of regions leads to questions of what determines the location of industry. Alfred Weber investigated the factors in the location of industry associated with the cost of transportation. Others, such as Christaller and Auguste Lösch, looked at the processes which establish regional systems of central places.

The relationships of the industries within a region are most easily analyzed in the format of Leontieff's input-output analysis. This methodology may also be extended to cover interregional relationships. Gravity models also play a role in describing the relationships within a region.

The economy of any major political unit is composed of regional economies. These regional economies have a coherence as a result of the economic relationships (linkages) among the parts. For example, the integrated circuits industry in the Metropolitan San Jose (Silicon Valley) region buy services and raw materials from other firms in the region. This is called a backward linkage. There is also a forward linkage of the integrated circuits industry to the region in that a significant share of its output is sold to other firms in the region.

Labor market areas and housing market areas, which are concepts closely related to the structure of a region, will also be covered. The course will tie occupational labor market markets and residential housing markets into the ethnic composition of the region and the socio-economic impacts of policy decisions.

Regional economics also covers social accounting systems which measure regional product and regional income. The conceptual problems and information requirements make regional accounts more difficult than national income accounting.

This model, which is fundamental to regional economics, is an elaboration of the intuitive notion of a regional economy being based upon a particular industry. Obviously the economy of San Jose and the rest of Santa Clara County is based upon the electronics and computer industry. Likewise the Seattle economy is based upon the aircraft manufacturing of Boeing.

The economic base model says that there are some employment in a region which is serving the local market and some employment which is independent of the local market. This latter employment is called Basic Employment. The other employment is called Local-Market-Serving Employment. Local-Market-Serving Employment would include employment in the supermarkets, department stores, medical offices, movie theatres, local government offices and schools. Basic Employment includes, but is not limited to, employment in industries that exports their products outside of the region. An example of basic employment that is not an export industry per se is tourism. In a sense tourism is sort of a special type of export industry. Employment in federal government agencies, such as the Federal Aviation Agency (FAA), is also basic employment. Even employment in state government agencies can serve as part of the economic base of a region. For example, an region in upstate New York that was suffering from loss of jobs was given a state prison to serve as part of its economic base. Generally basic employment is any employment that is serving market outside of the region and independent of the local market.

The economic base model can be formulated algebraically and is very similar to macroeconomic models. There is an employment multiplier analogous to the Keynesian multiplier in macroeconomic models.

The economic base model is as follows:

Total Employment is equal to

Base Employment plus Local-Market-Serving Employment

Local-Market-Serving is proportional to Total Employment.

In symbols:

T = B + L
L = cT.
The solution to the model is:
T = kB
where the employment multiplier k=1/(1-c).

The Location Quotient

One systematic method for identifying the economic base industries of a region is the method of location quotients. Let qi be the share of industry i in the total employment in the region and let Qi be the share of industry i's employment in the nation. The location quotient for industry i for the region, Li, is

Li = qi/Qi.

The theory is that if Li is greater than one then industry i is part of the economic base of the region. If Li is less than or equal to one then the industry is not part of the economic base.

Although the concept of the location quotient is reasonable and simple it is not an error-free means for identifying the economic base. Some of the problems with the theory are:

Distribution of employment by major industry groups for the U.S. in 1996:

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