Economic base

What Is Economic Base?

Economic base theory is a framework within regional economics that posits the economic growth of a region is primarily driven by its "basic" or export-oriented industries. These are sectors that produce goods and services sold outside the local area, bringing new wealth and income into the regional economy. Conversely, "non-basic" or service industries cater to the needs of the local population and recycle money within the region. The economic base concept helps analyze how external demand for a region's products and services influences its overall economic growth and prosperity.

History and Origin

The concept of the economic base, while having earlier roots in discussions of urban function, was significantly refined and formalized by economist Homer Hoyt in the late 1930s. Hoyt, working for the Federal Housing Administration (FHA) in the United States, applied this analytical approach in his influential 1939 study, The Structure and Growth of Residential Neighborhoods in American Cities.²⁷, ²⁸ His work aimed to understand how cities grew and developed, providing a structured approach to comprehending the spatial organization of urban areas based on their economic drivers.²⁵, ²⁶

While Hoyt is often credited with refining the method of economic base analysis, early applications of the concept in urban planning and geographical typology appeared in the U.S. during the 1920s.²⁴ However, its full application and development as a tool for general analysis of urban economies became more prominent through the work of scholars like Richard B. Andrews in the 1950s, who published a series of articles detailing the concept and its methodologies.¹⁹, ²⁰, ²¹, ²², ²³

Key Takeaways

• Economic base theory divides economic activity into basic (export-oriented) and non-basic (local-serving) sectors.
• Basic industries are considered the primary drivers of wealth generation and employment growth for a region.
• Changes in basic sector activity are expected to have a multiplied effect on total regional income and employment.
• The theory helps identify a region's competitive advantages and predict future economic trends.
• Understanding the economic base is crucial for economic development planning and policy-making.

Formula and Calculation

The core of economic base analysis often involves calculating the regional multiplier, which quantifies the total impact on a region's economy from a change in its basic sector. The simplest form of the economic base multiplier (k) is derived from the ratio of total employment to basic employment:

Alternatively, if we consider the relationship between basic and non-basic employment:

Let EB represent Basic Employment and ENB represent Non-Basic Employment. The ratio of non-basic to basic employment can be expressed as:

Then, the multiplier can also be expressed as:

This implies that for every new basic job, (1 + \beta) total jobs are created in the region.

Methods to identify basic and non-basic industries often include the location quotient (LQ), which compares the concentration of an industry in a region to its concentration nationally, or through direct surveys.¹⁷, ¹⁸

Interpreting the Economic Base

Interpreting the economic base of a region involves understanding the composition and stability of its basic industries. A region heavily reliant on a single basic industry may be more vulnerable to external economic shocks or industry downturns. Conversely, a diversified economic base with several strong basic industries can offer greater stability and resilience.

Analysts evaluate the economic base to determine the drivers of local prosperity. For instance, a high concentration of manufacturing exports suggests a robust export base, while an increase in service sector jobs that primarily cater to local needs indicates growth in the non-basic sector, often a result of prior basic sector expansion. The size of the multiplier indicates how significantly a change in basic activity will affect the overall gross domestic product (GDP) and employment within the region.¹⁶ A high multiplier suggests that a small increase in basic activity can lead to a substantial overall economic boost.

Hypothetical Example

Consider a hypothetical town, "Portside," whose economy is historically dependent on a large shipbuilding company, its primary basic industry. Initially, Portside has 1,000 people employed in shipbuilding (basic jobs) and 2,000 people employed in local services like retail, healthcare, and education (non-basic jobs). Total employment is 3,000.

The regional multiplier is ( \frac{3,000}{1,000} = 3 ).

Now, suppose the shipbuilding company secures a major new contract and expands, adding 200 new basic jobs. According to economic base theory, these 200 new basic jobs will create a ripple effect. With a multiplier of 3, the total new jobs expected in Portside would be ( 200 \times 3 = 600 ) jobs. This means that, in addition to the 200 new shipbuilding jobs, an estimated 400 new non-basic jobs would be created to support the increased population and spending. This expansion would lead to new residents, increased demand for housing, and growth in local businesses. This example highlights the interconnectedness of basic industries and non-basic industries within a regional economy.

Practical Applications

Economic base analysis is a crucial tool in urban planning, regional economic forecasting, and policy-making. It helps local governments and planners:

• Understand Economic Drivers: Identify which industries are truly "exporting" wealth into the region versus those that are simply recirculating existing money.
• Forecast Growth: Predict future changes in population, employment, and income by analyzing the prospects of basic industries.¹⁴, ¹⁵ For example, if a major basic employer announces an expansion or contraction, economic base analysis can estimate the broader impact.
• Inform Investment Decisions: Guide public and private investment towards sectors that strengthen the basic economy, thereby maximizing overall regional benefits. For instance, infrastructure projects supporting export logistics could be prioritized.
• Develop Strategic Plans: Craft policies aimed at attracting or retaining basic industries, diversifying the economic base, or fostering innovation within key sectors.¹³

The Federal Reserve Bank of St. Louis, for example, has published research discussing how economic base models are applied to analyze regional growth, particularly emphasizing the role of export activities as the primary source of local-area growth.¹²

Limitations and Criticisms

Despite its utility, economic base theory has several limitations and has faced various criticisms:

• Simplistic Dichotomy: Critics argue that the strict division between basic and non-basic activities can be overly simplistic and difficult to apply in practice, especially for increasingly integrated economies where services can also be "exported."⁹, ¹⁰, ¹¹ For instance, a local accounting firm might serve both local businesses and clients in other states.
• Multiplier Instability: The economic base multiplier is not constant over time or across different regions. It can vary due to factors like changes in local spending patterns, technological advancements, or shifts in supply and demand dynamics.⁷, ⁸
• Ignores Supply-Side Factors: The theory primarily focuses on the demand side of regional growth (external demand for exports) and often overlooks crucial supply-side factors such as labor availability, infrastructure, human capital, and the entrepreneurial environment.⁶
• Data Challenges: Accurately measuring basic and non-basic employment and income can be challenging due to data availability and the complexities of classifying certain industries.⁴, ⁵ Indirect methods like the location quotient have their own limitations.³

As Richard B. Andrews noted, while the theory provides a suitable starting point for urban economic analysis, it is not the "be-all and end-all" of such studies and should be considered a compromise compared to more comprehensive techniques like input-output analysis.¹, ²

Economic Base vs. Location Quotient

While closely related, the economic base refers to the theoretical framework that explains regional economic growth, while the location quotient (LQ) is a quantitative tool used within economic base analysis.

The location quotient helps analysts determine which industries are disproportionately concentrated in a region compared to a larger reference area (like the nation), suggesting they are producing a surplus for export and thus contribute to the economic base. However, LQ alone does not constitute the entire economic base analysis, which involves understanding the multiplier effects and policy implications.

FAQs

What are basic industries?

Basic industries, also known as export industries, are those that produce goods and services for sale outside the local region. They bring new money into the local economy, acting as the primary engine for economic expansion. Examples include large manufacturing plants selling products globally, major tourism sectors, or specialized technology firms exporting software.

What are non-basic industries?

Non-basic industries, or service industries, produce goods and services primarily for consumption within the local region. They recycle money that has already entered the economy through basic industries or other external sources. Examples include local retail stores, restaurants, schools, and hospitals that serve the residents of the community. The growth of non-basic industries typically follows the growth of the basic sector.

How does economic base theory help regional development?

Economic base theory helps regional development by identifying the key industries that drive wealth into a community. By understanding and supporting these basic industries, policymakers can formulate strategies to foster job creation, attract investment, and enhance overall regional prosperity. It allows for targeted efforts to strengthen a region's competitive advantages in the broader economy.