Local economy

What Is Local Economy?

A local economy refers to the economic activities and interactions that occur within a specific geographical area, such as a city, town, county, or metropolitan area. It encompasses the production, distribution, and consumption of goods and services at a community or regional level, forming a critical component of Economic Development. The health of a local economy is determined by factors like employment, income levels, business activity, and the flow of money within the community. When money circulates locally, it can create a multiplier effect, benefiting multiple businesses and individuals within the area.²⁶ A strong local economy fosters job opportunities, encourages entrepreneurship, and enhances the overall quality of life for residents.²⁵

History and Origin

The concept and focus on local economies are as old as human settlements, with communities historically relying on nearby resources and trade networks. However, the formal study and intentional development of local economies as a distinct field of policy and analysis gained prominence, particularly in the United States, following the mid-22nd century. The Public Works and Economic Development Act of 1965 authorized the creation of the U.S. Economic Development Administration (EDA), an agency within the Department of Commerce, to stimulate industrial and commercial growth and create jobs in economically distressed communities across the nation.²⁴, This marked a significant federal commitment to understanding and intervening in local economic conditions, building upon earlier efforts in American state and local economic development that date back to the early days of the Republic.²³ Over time, the approach to local economy shifted from purely attracting large businesses to fostering homegrown innovation and supporting existing Small and Medium-sized Enterprises (SMEs).²²

Key Takeaways

• A local economy represents the economic activities confined to a specific geographic area, influencing local livelihoods.
• It is characterized by the flow of money, goods, and services within the community.
• Factors like local spending, diverse industries, and robust infrastructure contribute to its resilience.
• Policymakers and businesses analyze local economic data to make informed decisions for growth and stability.
• Supporting the local economy can lead to increased wealth retention, job creation, and improved community well-being.

Interpreting the Local Economy

Interpreting the local economy involves assessing various economic indicators to understand its current health and future prospects. Key metrics often include the employment rate, which indicates job availability; personal income levels, reflecting residents' purchasing power; and local Gross Domestic Product (GDP) by county or metropolitan area, which measures the total economic output. Analyzing these data points helps stakeholders identify strengths, weaknesses, and opportunities. For instance, a rising employment rate coupled with increasing personal income suggests a thriving local economy, while declines in these areas may signal a downturn. Understanding industry-specific data, such as the growth of particular sectors, can also provide insights into a local economy's resilience and future potential.²¹

Hypothetical Example

Consider "Techville," a hypothetical small city that has historically relied on a single manufacturing plant for most of its employment and economic growth. When the plant announces it will downsize significantly, Techville's local economy faces a major challenge.

To respond, the city government, in collaboration with local businesses and community organizations, develops a strategy to diversify the local economy. They analyze existing skills among the workforce and identify opportunities for retraining. The city offers incentives for new tech startups to establish themselves, leveraging a local university's computer science program. They also invest in improving local internet infrastructure and create co-working spaces. As a result, new jobs are created in the technology sector, and former manufacturing workers are retrained for these roles. This strategic shift helps Techville build a more resilient local economy, less dependent on a single industry, and fosters a new wave of investment and economic activity.

Practical Applications

Understanding the local economy is crucial for various stakeholders, from local governments to individual investors. Local authorities use economic data to formulate fiscal policy and develop strategies for community development, such as allocating resources for infrastructure projects, supporting local businesses, and attracting new industries.²⁰,¹⁹ Businesses leverage this insight for market entry decisions, product launches, and expansion plans, tailoring their strategies to specific localized conditions rather than just national trends.¹⁸ Investors might analyze a local economy's stability and growth prospects when considering real estate investments or evaluating local businesses. The U.S. Bureau of Economic Analysis (BEA) provides extensive regional economic accounts, including GDP by state and local area personal income, which are widely used by federal agencies, academic researchers, and businesses for detailed analysis of local economic activity.¹⁷,¹⁶

Limitations and Criticisms

While focusing on the local economy offers many benefits, there are inherent limitations and criticisms. One challenge is the potential for policies to become too narrowly focused, missing broader trends that originate outside the local area, such as shifts in the national or global supply chain or the impacts of globalization.¹⁵,¹⁴ Local economic development initiatives can sometimes be criticized for engaging in "beggar-thy-neighbor" policies, where cities compete against each other for businesses through tax incentives, potentially leading to a race to the bottom without genuine overall productivity gains.¹³ Furthermore, the success of local economic policies can be difficult to measure, and critics argue that strong links between local policy and economic outcomes may be less direct than often assumed, with larger economic forces playing a more dominant role.¹² Issues such as limited access to funding, inadequate infrastructure, and a lack of skilled human resources can also hinder the successful implementation of local economic development efforts.¹¹,¹⁰ Urban areas, in particular, face challenges related to inequality, housing shortages, and strains on public services, which can impede inclusive growth within their local economies.⁹,⁸

Local Economy vs. Regional Economy

The terms "local economy" and "regional economy" are often used interchangeably, but they refer to different scales of economic activity. A local economy typically pertains to the economic functions within a smaller, more granular geographic area, such as a single city, town, or county. It emphasizes community-level interactions, local business support, and direct impact on residents within that immediate vicinity. The focus is often on factors like local employment, neighborhood services, and the circulation of money within that specific community.

In contrast, a regional economy encompasses a broader geographical scope, often spanning multiple counties, a metropolitan area, or even an entire state or a collection of states with interconnected economic activities. A regional economy considers larger-scale industrial clusters, shared labor markets, transportation networks, and broader economic flows that link several local economies together. For example, the Bureau of Economic Analysis (BEA) provides data on regional economic accounts to analyze these broader geographic distributions of U.S. economic activity. While both concepts are vital for economic analysis, the regional economy looks at the synergy and interdependencies between multiple smaller local economies.

FAQs

How does supporting local businesses benefit the local economy?

Supporting local businesses keeps money circulating within the community, creating a multiplier effect. Studies show that a significant portion of money spent at local businesses is reinvested locally, leading to more jobs, increased tax revenue for public services, and overall economic resilience.⁷,⁶

What role do local governments play in the local economy?

Local governments are crucial in fostering a healthy local economy. They implement policies, provide public goods and services, and invest in infrastructure to create a favorable business environment. They also engage in strategic planning, business recruitment, and workforce development initiatives.⁵,⁴

What data points are important for understanding a local economy?

Key data points for understanding a local economy include Gross Domestic Product (GDP) by area, employment rates, average wages, personal income, housing prices, retail sales, and industry-specific data. These indicators help assess the economic health and trends of a specific locale.³,²

How does a local economy adapt to economic downturns?

A resilient local economy can adapt to downturns through diversification of industries, strong local spending, and community-led initiatives that support local businesses and entrepreneurship. During the COVID-19 pandemic, local economies with strong community ties and internal spending mechanisms showed greater resilience against global supply chain disruptions.¹