the basis of economic base theory (or export base theory) is the market hypothesis: "an...

ECONOMIC BASE THEORY

The basis of economic base theory (or export base theory) is the market hypothesis:

"An area's growth rate depends on the export

demand for goods and services in which the area has a comparative cost advantage."

In other words, an area (city, region, nation) must trade to survive, and it must trade in those goods that it can produce relatively cheaper than other

places.

That is, those goods in which it has a comparative cost advantage.

ECONOMIC BASE THEORY

Economics Warning!!!ECONOMIC BASE THEORY - COMPARATIVE COST

This is a very important but subtle economic concept to understand.

Comparative cost advantage does not mean that you can produce goods more cheaply than your

competitors can in absolute terms.

It means that you can produce goods cheaper than your competitors can in relative terms.

In fact, and here’s the subtle part:you will trade even if you are better at everything than your competitor, and they can trade even if

they are worse at everything than you.

COMPARATIVE COST ADVANTAGE

ECONOMIC BASE THEORY - COMPARATIVE COST

It all has to do with the lost opportunity cost of producing different goods.

That is, even if you are better than everyone else at producing two products, you may be much better at

producing one of those products.

This means that you would be better served by producing more of the product you can produce more

profitably, than by producing both products.

By analogy, Michael Jordan was very good at basketball. He’s apparently a good typist as well. But

it paid him much more to shoot hoops than get a typing job.

COMPARATIVE COST ADVANTAGE


COMPARATIVE COST ADVANTAGEUnits of input needed to

produce 100 carsUnits of input needed to produce 1,000 computers

Canada 2 units of input(50 cars for each unit of input)

3 units of input(333 computers for each unit of

input)

Italy 4 units of input(25 cars for each unit of input)

4 units of input(250 computers for each unit of

input)

Diff per unit

Canada produces 2 times as many cars as Italy per unit of

input.

Canada produces about 1.3 times more computers as Italy

per unit of input.

Canada produces both items more cheaply per unit than Italy in absolute terms but Canada is better relatively at producing cars

than computers – 2 times versus 1.3 times.If it used all of its inputs for cars, it would get more cars than

computers, than if it used all of its inputs for computers.ECONOMIC BASE THEORY - COMPARATIVE COST

COMPARATIVE COST ADVANTAGECost to

produce 100 cars

Cost to produce

1,000 computers

Cars “lost” because you produce computers

Computers "lost” because you produce cars

Canada 2 units(50 each)

3 units(333 each)

150(3 units*50)

666(2 units*333)

Italy 4 units(25 each)

4 units(250 each)

100(4 units*25)

1,000(4 units*250)

So if Canada and Italy choose not to produce computers and redirect their resources to producing cars, Canada can produce

more extra cars that Italy.

And if Canada and Italy choose not to produce cars but redirect their resources to producing computers, then Italy can produce

more extra computers that Canada.


Economic Base Theory (EBT) postulates two parts to an economy:

The basic sector (or the export or traded sector):

Activities in this sector earn export income for the area.E.G. a factory.

The non-basic sector (or the local or non-traded sector):Activities in this sector do not earn export income for an area - they are the support activities for the basic sector.

E.G. a retail store.

However, as we shall see, factories and stores can be both.

BASIC & NON-BASIC ACTIVITIES

ECONOMIC BASE THEORY - BASIC NON-BASIC ACTIVITIES

The EBT relationship:Non-basic activities support the basic activities, while basic activities in turn support the economic health of

the area.

Elements:Basic economic activity (income earning).

Non-basic economic activity (supports basic activity).Household multiplier (supports basic and non-basic).

Linkages (connections between the elements).

BASIC & NON-BASIC ACTIVITIES


Basic economic activity (income earning) includes:

Exports: goods, export services, tourism, retail.

Investments: housing, business infrastructure e.g. offices and factories, urban infrastructure e.g. roads, etc.

Government Expenditures: government spending, current

operations, transfer payments, etc.

Basic activities are considered "exogenous" in the EBT model - i.e. independently introduced and/or stimulated

from outside the region/nation.

BASIC ACTIVITIES


Non-basic economic activity (not income earning) includes:

Local oriented activities such as retail, services, local public sector such as schools, police.

They support basic activities.

Basic activities are considered “endogenous" in the EBT model - i.e. effects are generated by supply/demand

relationships within the region/nation.

NON-BASIC ACTIVITIES


Regional Economy

Local Economy

$$$$$$

$$$$$$Basic economy driven by external dollars.

Local economy driven by the

basic economy.

Growing basic activities generate

jobs and export income

Non-basic activities required to support

basic sector.

Jobs and local income generated.

Area infrastructure grows as

prosperity grows.

Growing area attracts more basic

activities.

THE EXPORT BASE GROWTH CYCLEEXPORT INCOME

Household multiplierECONOMIC BASE THEORY - BASIC NON-BASIC ACTIVITIES

Declining basic activities decrease

jobs and export income

Non-basic activities required to support basic sector decline.

Jobs and local income are lost.

Area infrastructure stagnates as

prosperity declines.

Declining area discourages more

basic activities.

THE EXPORT BASE DECLINE CYCLEEXPORT INCOME

DECLINES

Household multiplierECONOMIC BASE THEORY - BASIC NON-BASIC ACTIVITIES

Two of the major problems in conceptualising and operationalizing EBT are:

Defining the spatial areas involved – that is, what does “outside” the region and hence

exports mean?

Determining which activities or proportion of an activity are basic and which are non-basic;

that is, what activities are export?

PROBLEMS OF DEFINING AREAS & ACTIVITIES

ECONOMIC BASE THEORY - DEFINING AREAS

Area A

PROBLEMS OF DEFINING AREAS

Economic activity #1

Consumer #1

Consumer #2

Economic activity #2

100%

Economic activity #1 is non-basic to Area A.

80%

20%

Economic activity #1 is basic & non-basic to Area A.Economic activity #1 is non-basic to national economy.Economic activity #2 is basic to Nation B.

National Boundary

Basic and non-basic proportions can be measured in terms of employment, production, sales etc. Employment is usually used.

ECONOMIC BASE THEORY - DEFINING AREASNation BEconomic activity #2 is basic & non basic to Nation B.

80%

20%

Primary Sector: resource extraction activities, such as agriculture, mining, lumber.

Secondary Sector: manufacturing or goods producing activities.

Tertiary Sector: services activities such as retail, wholesale, tourism, health care, banking, etc.

Quaternary sector: involves activities of the so-called intellectual/information sector, such as government, education, culture, information,

scientific research.

PROBLEMS OF DEFINING ACTIVITIES

ECONOMIC BASE THEORY - DEFINING ACTIVITIES

PROBLEMS OF DEFINING ACTIVITIESSimple model: Primary and secondary activities are

basic and all others are non-basic.Strength:

Easily understood and easy to apply.Weakness:

Completely unrealistic, especially in today’s globalized service based economy.

Realistic model: That all activities have some proportion of their output as both basic and non-

basic.Strength:

Much more realistic.Weakness:

Much more difficult to measure and apply.


TYPICAL ECONOMIC BASE STRUCTURE

Resources sector

Manufacturingsector

Services sector

Quaternary sector

ForestryFarm

Electronics Auto maker

Electronics store Grocery

store

Auto Dealer

SchoolsUniversity

EXPORTSIMPORTS

LOCAL

HOUSEHOLD


EBT is linked to the overall socio-economic structure of communities in terms of local and non-local inputs and

outputs, and their relative strengths. So…

When a factory that exports goods opens (or closes) not only will the factory jobs be gained (or lost), but non-basic support jobs that depended on the factory jobs will also be

gained (or lost).

On the other hand, if a non-basic activity (such as a retail store) closes down, only the jobs from that store will be lost.

This relationship is conceptualised in the basic/non-basic

ratio and the multiplier concept.

THE ECONOMIC BASE RATIO AND MULTIPLIER

ECONOMIC BASE THEORY - RATIO AND MULTIPLIER

Number of non-basic jobs

Number of basic jobs

For example, if 60% of the employment in a place is non-basic, and 40% is therefore basic, the NB:B ratio is 60/40, or 1.5, meaning that there are 1.5

non-basic jobs for every basic job.

Thus, we can say that NB = f(B), which leads us to the very important concept of the economic

multiplier.

THE NON-BASIC TO BASIC RATIO


Postulates that changes in basic activity in an economy ripples through or multiplies its effect due to the relationship

between basic and non-basic activities.

The relationship NB = f(B) generates the previously discussed NB:B ratio, with the total impact or multiplier being:

M± = 1 + (NB/B)Using the previous numbers (NB = 60%, B = 40%):

M± = 1 + (60/40) = 2.5

Thus, if a new factory opens in an area, the total impact on the employment structure of the area will be 2.5 jobs: 1 new

basic job and 1.5 non-basic jobs.

THE ECONOMIC MULTIPLIER


CALCULATING ECONOMIC BASE

This model can be developed even further to incorporate all the iterations that must be accounted for when a new basic job is

created:

TE = DE + IE + ME + FE + HDwhere,TE: total induced employment.DE: Direct induced employment (basic export jobs).IE: Indirect induced employment (spin-off industries).ME: Indirect municipal employment (services & non-basic jobs).FE: Indirect final demand (created by iteration).*HD: Indirect household demand (created by families of workers)

*Iteration is the process by which non-basic jobs create other non-basic jobs, etc.

2.5


CALCULATING ECONOMIC BASEMay all seem pretty easy and it is – it’s just arithmetic

after all. But the devil is in the details.

To calculate an economic base, even assuming the f in NB+(f)B, and the relationships are all constant over

time as space, you would need:

• Accurate and timely employment data for economic activities;

• Some type of categorization for those activities, at a small enough sectoral scale to be useful (resource, manufacturing, service sectors is not);

• Have the data available at a small enough spatial scale for your community.

Do we? And if so where would one find all this?ECONOMIC BASE THEORY - RATIO AND MULTIPLIER

• It assumes that a relationship exists between B and NB jobs, which is probably O.K., but is this relationship constant:

• Over time? Do we get more efficient at providing non-basic jobs; I.E. the relationship between the basic and non-basic sectors is curvilinear and not linear.

• Over city size? Are larger cities more efficient at providing support for new basic jobs, given scale economies?

• Over magnitude of B? That is, does every one of the new B jobs generate in the same ratio as the first?

• Backwards?? That is, does the negative multiplier work in the same ratio as the positive multiplier?

• What proportion of the NB jobs are actually B? People who use malls in a place do not all come from that place.

• The two problems mentioned earlier with respect to boundaries and exactly what activities are B and NB.

ISSUES WITH EBT

ECONOMIC BASE THEORY - ISSUES

Despite the issues, EBT has much utility in describing and explaining why spatial

economies work the way that they do and we will be returning to it on many occasions

throughout this course.

We will look at some of the empirical ways in which EBT can be measured in the methods

and data lecture.

SUMMARY OF EBT

ECONOMIC BASE THEORY - ISSUES

Term Assignment

WHAT IS AN ESSAY PROPOSAL?Read Word docs on what to do, process flowchart,

proposal example table, and the PDFs of good and poor proposals.

This is a research proposal and that is what you will be graded on and not the topic you choose.

Do not pick a huge topic that is undoable because:You can’t get the data.

You need too much data.It’s too complex for this level.

There really isn’t any cause and effect to find.

Any topic in economic geography will do – that means find something within the lecture areas dealt with in this

course.

GETTING DATAI have uploaded the lecture slides on data classification and

methods, in case you need the material. We won’t do this stuff in class due to time constraints.

Getting data depends on the scale at which you choose to work so the rule of thumb is:

The more detail you want, the harder it becomes to get the data – for example:

• Global data is easy to find on any topic – city data is not.• Some variables such as employment are common - other

variables such as capital investment are not.• Data on big economic activities such as rubber manufacturing

are easy to find – data on the condom industry are not.• The further back in time you go, the harder the data will be to

find and convert to constant dollars.• Annual data is easy to find – quarterly is not.

So – keep it simple and larger scale.

FINAL POINTERSThis project requires you to formulate a research question and

then answer it.

To do that you need:

A context – some area you are interested in that can generate…

???A question – one that can be answered with data.???

A way of answering it – have expectations that state…

This variable for this place over this time period should do this thing if my research question is correct.

Some examples:

EXAMPLES

CONTEXT RESEARCH QUESTION POTENTIAL PROBLEMS

Globalisation should have led to more trade than production

as a proportion of GDP.

Has global trade value grown faster than global

manufacturing value as proportions of GDP?

Can you get global values on trade, manufacturing and

GDP?

Climate change has increased/decreased yield of

maple sap leading to increases/decreases in maple

syrup production in Canada/Quebec. (You find out

which it is).

Has global production of maple syrup, and temperature increased/decreased over the

past 100 years?

Very detailed data required for maple syrup production?

Are temperatures actually increasing/decreasing at small

regional scales such as Quebec?

Globalisation should have led to increasing national incomes

and demographic development.

Lots here. Has income increased at all and has it led

to any or all of:Declining birth/death/ fertility rates. Changed demographic

transition

Not many, all data are available for regional groups of nations from UN, World

Bank, IMF, Population Reference Bureau, etc.

You have a few detailed examples already done in the handouts for the assignment. Read through them and understand what they are trying to do.

EXAMPLES CONTINUED

EXPECTATIONS DATA SOURCES METHODS

Trade as a % of GDP should have increased faster than

manufacturing (industry) since 1960.

World and regional (e.g. high, middle, low income nations)

data from World Bank Indicators or IMF.

Three graphs one each for regions, with trade and

industry proportions plotted.

As climate has warmed, maple syrup production has

increased (say). Could ask “has temperature affected

production?”

For syrup production don’t know, but maybe Stats Canada

or Maple Syrup Association (?). For temperature,

Environment Canada, Weather Network maybe.

Plot production in gallons against temp over time, say

last 50 years.

GDP per capita in constant dollars should have increased and led to decreases/changes

in whatever demographic variable(s)/model you like.

World Bank, U.N., IMF, PRB. Plot graphs looking for required direct or inverse

relationships and/or do correlations if you know how.

You have a few detailed examples already done in the handouts for the assignment. Read through them and understand what they are trying to do.

Analysis Considerations

Current to Constant Dollar ConversionCurrent dollars are not corrected for inflation so part of the

change over time in values does not come from growth, so you need to find or calculate constant dollar values.

To remove effect of inflation:Current 2003 GDP = $1,213,175,000,000

CPI (2002=100) = 102.8

Formula:Constant 2002$ = Current $/(CPI/100)

Calculated:Current 2003 GDP $ = $1,213,175,000,000/(102.8/100) =

Constant 2003 GDP $ = $1,180,131,322,957.20

Absolute and Relative Change

This idea is easy to look for and to overlook.

Economic change is rarely a +/- <> = game in an absolute sense.

That is, the data we use and the comparisons we make rarely present themselves as absolute

increases and decline, positives, negatives, and equalities.

Most times you are dealing with relative and not absolute change.


Time

Percent Employment

Change

Consider the following scenario for employment change in two regions. It is clear that one is growing and one is declining

in absolute terms.

Region A

Region B

Region B is declining in

absolute terms.


Time

Percent Employment

Change

Now consider this scenario, where it is much less clear what is happening. Both regions are growing, but region A has higher growth relative to Region B. From an economic point of view, Region B can be

said to be declining in relation to region A.

Region A

Region B

Region B is declining in relative terms.


Time

Percent Employment

Change

In this scenario it is region A that is declining relative to Region B. From an economic point of view, Region A can be said to be declining

in relation to region B, even though both are growing.

Region A

Region BNow region A is

declining in relative terms.


Time

Percent Employment

Change

In this scenario it is region A that is ‘growing’ relative to Region B. From an economic point of view, Region A can be said to be growing

in relation to region B, even though both are declining.

Region A

Region B

Now region A is increasing in relative terms.


Time

Percent Employment

Change

In this scenario region B shows an ‘inflection point’ where its profile changes from relative decline to relative growth in relation to region A.

Region A

Region B

Inflection point

Region B is declining then increasing in

relative terms.

Absolute and Relative ChangeThe point of these simple examples is to illustrate that the idea of relative and absolute change need to be considered

when analysing spatial economic data.

The same can be said for the idea of rates of change versus levels of change.

A rate of change is a mathematical measure of change in a variable’s value over time.

A level of change is a mathematical measure of a variable’s value attained at a given point in time.

While this may seem pedantic, it is important for the same reasons that absolute and relative change is.

Rates Versus Levels of Change

Time

Percent Employment

Change

In this scenario region B has attained the same level of change (in this case growth) as region A, but has done so much faster. Subsequently, region B may suffer from problems associated with such a rapid pace of growth (e.g. supply issues, labour shortages, pollution) that region

A did not suffer. This is typical of rapidly developing economies.

Region A Region

B

Rate of change

Rate of c

hange

Level of change

Region B’s PeriodicityRegion A’s Periodicity

Finally:Go look through the classifications,

methods, data slide show for ideas on analysis.

Try and have a bit of a rest next week.

the basis of economic base theory (or export base theory) is the market hypothesis: "an...

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