about an area's future population is incomplete without a
parallel understanding of the local economy that largely
shapes its future." (Klosterman, p. 113)
The above quote from
Klosterman helps to illustrate the importance of coupling
local population estimates or forecasts to an in-depth
knowledge of the local economy. Whereas population
projections function to estimate the number of persons in
an area, these projections do not provide any insight
into the most important factor in local growth and
decline: the local economy. If the local economy is
strong, as it has been in the Seattle Metropolitan Area
for the past several years, population growth is usually
brisk. In times of economic trouble, though, an area
often will experience a loss in population- a direct
result of a stagnant economy.
Knowledge of the
local economy usually results via analysis using a
variety of economic base analytical techniques. Klosterman notes
that the economic base technique "is the oldest,
simplest and most widely used technique for regional
economic analysis." (p. 113) It is an analytical
method that illustrates many fundamental techniques used
by local and regional planners, including areal
comparisons, local versus regional/national conditions,
and standardizing values.
The economic base
technique is grounded in the assumption that the local
economy can be divided into two very general sectors: 1)
a basic (or
non-local) sector or 2) a non-basic (or local) sector.
Sector: This sector is made up of local
businesses (firms) that are entirely dependent upon
external factors. For example, Boeing builds and
sells large airplanes to companies and countries
located throughout the world. Their business is
dependent almost entirely upon non-local firms.
Boeing does not sell planes to families or
households locally, so their business is very
much dependent upon exporting their goods.
Manufacturing and local resource-oriented firms
(like logging or mining) are usually considered
to be basic sector firms because their fortunes
depend largely upon non-local factors, they
Sector: The non-basic sector, in contrast, is
composed of those firms that depend largely upon
local business conditions. For example, a local
grocery store sells its goods to local
households, businesses, and individuals. Its
clientele is locally based and, therefore, its
products are consumed locally. Almost all local
services (like drycleaners, restaurants, and drug
stores) are identified as non-basic because they
depend almost entirely on local factors.
Economic Base Theory
assumes that all local economic activities can be
identified as basic or non-basic. Firms that sell to both
local and an export market must, therefore, be assigned
to one of these sectors or some means of apportioning
their employment to each sector must be employed. Means
of assigning firms to basic and non-basic sectors will be
discussed in the various techniques outlined below.
Importance of the Economic Base
Why is the basic/non-basic distinction
important? Economic Base Theory asserts that the means of
strengthening and growing the local economy is to develop
and enhance the basic sector. The basic sector is
therefore identified as the "engine" of the
economic base technique is based on a simple causal
model that assumes that the basic sector is the prime
cause of local economic growth, that it is the
economic base of the local economy."
(Klosterman, p. 115)
Economic Base Theory
also posits that the local economy is strongest when it
develops those economic sectors that are not closely tied
to the local economy. By developing firms that rely
primarily on external markets, the local economy can
better insulate itself from economic downturns because,
it is hoped, these external markets will remain strong
even if the local economy experiences problems. In
contrast, a local economy wholly dependent upon local
factors will have great trouble responding to economic
The method for
estimating the impact of the basic sector upon the local
economy is the Base Multiplier.
The base multiplier is calculated via the following
Base Multiplier =
Total Employment Year i
Basic Employment Year i
Simply stated, the
Base Multiplier can provide insight as to how many
non-basic jobs are created by one base job. An example
Base Multiplier =
Total Employment Year i
Employment Year i
In this example,
locality X has a Base Multiplier of 1.90. This multiplier
estimates that for every one Basic Sector job created, 0.90 Non-basic Sector jobs are
created (or for every 10 basic sector jobs we would expect 9 non-basic
sector jobs). The non-basic
jobs are usually in the form of personal/business
services or related-goods employment.
A Local Example:
Some estimates have placed Boeing's impact (a firm which
provides predominately basic sector employment) at over 4
non-basic jobs for every 1 Boeing job. Their Base
Multiplier would be something on the order of 4.3. How
can this be? For every Boeing job created to help build
airplanes, a job may be created in another manufacturing
sector (for airplane parts not made by Boeing, for
example), a job may be created in office services that
have Boeing as a client (a human resources agency, for
example), and perhaps two jobs in personal services (a
restaurant job and a job at a local drug store, for
example). Now these jobs are not directly tied to that
one specific Boeing job in that if that Boeing job is
phased out one day the other jobs will not exist the next
day. But, ultimately, Boeing's employment is a major
factor in the number of business and personal services
offered in the area. If Boeing cuts its workforce by
several thousand, the local economy will likely lose a
far greater number of jobs, on the order of four for
every one of Boeing's.
Analysis can be performed by way of several different
techniques. However, each of these techniques is based
upon general Economic Base concepts like the assignment
of firms to basic or non-basic sectors and the
calculation of a base multiplier (or multipliers).
Prior to introducing
the different economic base analysis techniques, a few
other general points should be mentioned. Klosterman
identifies two key decisions that need to be made at the
beginning of this analytical process.
your study area: It is important to note that
the "local economy" means different things to
different people. As a planner for the city of Redmond,
for example, the local economy may mean your city's
economy as compared to the regions. In contrast, if you
were working for the Puget Sound Regional Council, you
would likely be comparing the metropolitan economy to
that of the West or even the Nation as a whole. What this
suggests to planners is that one should be sure to
identify the boundaries of the local economy versus the
external world. It is also important to note that this
will have a significant impact upon your results as the
economic base model is grounded upon the distinction
between the local and the external economies.
2) Select Your
Measurement Units: Economic base analysis
usually is undertaken using Employment data. This unit of
analysis, the number of jobs, is most common because
employment data is available from the Census Bureau.
However, these same techniques can be used on other
economic units like Payroll and Sales and Value Added.
Lastly, a brief
mention of data availability is necessary. Most economic
data for use in economic base analysis is taken from the
US Census Bureau's County Business Patterns. This data is collected annually and it
provides employment and payroll information for counties
and cities throughout the United States. To organize this
employment and payroll data, a Standard
was developed by the U.S. Office and Management and
Budget. For more information on this classification, go
to the SIC
Code page. Gathering and
using this data, the analyst can utilize the various
economic base techniques to determine the strengths,
weaknesses, and overall form of the local economy.
There are any number
of ways to analyze the strengths/weaknesses,
specializations, and overall diversity of the local
economy. The three techniques below offer planners a set
of simple, but popular tools to perform such analyses.
These techniques also illustrate core principles
underlying the quantitative analysis of data by the
Assumption Technique is by far the simplest economic
analysis tool available to planners. This method
estimates local Basic sector employment by using a
fundamental set of assumptions
about the local economy.
Quotient Technique: A
step up in complexity, the Location Quotient
Technique determines the level of Basic sector
employment by comparing the local economy to the
economy of a larger geographic unit like the State or
the entire United States.
the Minimum Requirements Technique is the most
complex economic base analysis method. This method
compares the local economy with the economies of a
sample of similarly sized regions.
Once the local
economy has come to be understood in more depth, often a
planner's attention turns toward the future. What
projections can be made about the local economy? To
address this question, techniques related to the above
methods have been developed. Again, these techniques are
not solely related to economic base analysis, but,
rather, illustrate some of the guiding principles when
making projections of any kind.
This technique assumes a local share of region's
activity for individual industries will remain
constant into the future. Like the Location Quotient
technique above, a larger reference region is used,
in this case, to project future economic conditions.
Shift-Share Projection Technique: This technique adds some complexity to
the Constant Share Projection Technique. The
Shift-Share method adds a "shift" factor to
the equation to attempt to account for the movement
of jobs into or out of the local economy due to
factors affecting the local economy.
Non-basic sectors: Exports versus Imports
Why the Basic
Sector is considered more important to the local
Multiplier: Interpretation, Calculation
geographic and measurement units
Planning profession is intimately tied to both
population and economic considerations (and many
others, of course). Counting persons and
households is essential to understanding the
future and prospects for an area. Equally
important is an understanding of the strengths,
weaknesses, and changes within the local economy.
Economic Base Theory provides a framework for
understanding the local economy and points
towards several techniques for analyzing the
techniques that have developed from this theory
attempt to translate general principles
concerning the local economy into calculable and
tangible evidence about that economy. It is
essential to understand the power and the
limitations of this translation.
then, Economic Base Theory provides an overall
framework to understand and specific tools to
analyze the local economy. However, these methods
should only be used with a clear understanding of
what information is generated through an
application of these techniques and what
information is not provided through an
application of these techniques.
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