Multipliers and the Economic Base Concept

• Basic Relationships in the Economic Base Model (and Exercise)
• What is a "Multiplier"?
• Location Quotient Approach
• Minimum Requirements Approach
• Economic Base Multipliers
• Economic Base (Employment) Multiplier
• A simple model for a simple local economy (see handout)
• B/NB Ratios & Multipliers found in the Literature
• Income Multiplier Exercise
• Short- and Long-Term Forecasts and Multipliers
• Space and Time in Multiplier Analysis
• Impact Studies
  
  

• History of the Economic Base Concept:
  • Schaffer's Account [in Regional Impact Models, Ch.2]
  • Werner Sombart (Krumme)
  • J. M. Keynes
  • Table with Historical Multipliers

• What are "basic" and "non-basic" activities? (see Goodall)
  • Basic:
    • Exports (incl. Export Services, Tourism)
    • Investments: Housing, Business etc.
    • Government Expenditures (Gov. Investments, Current Operations),
    • Transfer Payments

    = "exogenous" to (or independently introduced from outside) our model

  • "Non-Basic": household-induced, local-service oriented activities = "endogenous" to our model (effects generated by the relationships within model)

• How do we distinguish basic from non-basic activities empirically?

• What is a "multiplier"?

• What are "multiplier effects"?

• Employment or Income Multipliers; Regional & Interregional Multipliers

• What affects the size of the multiplier?
  • size of region by population, employment, income, area The larger the region (all other things equal ["ceteris paribus"]) the larger we would expect the multiplier to be. More of the imports ("leakages") would become intra-regional transactions. More activities would be expected to reach their threshold conditions, i.e. would find sufficient demand (to be viable) within the region. Thus, less goods and services would have to be imported. Thus, a larger percentage of the expenditures would stay within the region and thus lead to further linkage effects and income inducements within the region.
  • geographic isolation, high transport & communication costs for exports & imports Isolation implies relatively high transport and/or communications costs which "protect" local production. Thus, one would expect a higher "pcl" (propensity to consume locally) and "icles" (income created per dollar of local consumption sales).
  • specialization, economic structure of region Strong comparative advantages of the export sectors may lead to non-competitiveness of some of the non-basic activities for local factors of production (land, labor); thus, more consumption goods and services may be imported than would otherwise be the case, in spite of higher transport costs, leading to lower multipliers. Conversely, a weak comparative advantages would lead to higher self-sufficiency and higher multipliers.
  • socio-economic attributes (incl. per-capita income & income distribution)
  • time horizon (short- versus long-run) Processes associated with the multiplier occur over time. Thus, if one allows for longer periods of time for the multiplier effects to work themselves out, the multiplier can be considered to be larger.
    Lit.: Charles M. Tiebout, Community Economic Base Study, Ch.6
  • local protectionism and "import substitution policies"
  • community power structure affecting the economic structure of the community and thereby the multiplier.

• Time and Space in Multiplier Analysis: [Table: Short- and Long-Run Multipliers] Time and space have similar impacts on the variability of multipliers: Larger spaces (ceteris paribus) reduce the "leakages", lengthen the multiplier-chains and permit the multiplier to create larger effects. Longer time periods have the same implications: Longer time horizons lengthen the exogenously induced reaction chains; more adjustments and more types of adjustments can plausibly be connected to the initial stimulus (exports). While short-run multiplier restrict the impacts to consumption and indirect requirements purchases, longer-run multipliers would also also connect government activities and investment decisions to a then narrower scope of exogenous stimuli, namely mainly exports. Correspondingly, the endogenous part of the model increases just like larger regions increases the endogenous model content. However, the increased 'nominal' explanatory power of the model based on larger spaces and longer time horizons does not come without a price: the longer assumed reaction chains eventually corrode "causal credibility" of the model due to increased opportunity losses as well as structural changes in the linkage system coming with the longer time spans.

  One important difference between the temporal and spatial facets of the multiplier is associated with the phenomenon that multiplier effects may precede the actual stimulus due to the fact that business and consumption decisions are based not just on monetary earning flows and transactions but also on information flows leading to expectations and thereby to decisions which can affect expenditures or employment changes before the cause has been consummated. A spatial analogy does not appear to exist.

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• Projections:
  • Projections to 2045: Methods Used to Prepare the Projections (REIS) [The Regional Economic Information System (REIS), from the Bureau of Economic Analysis, GOVERNMENT INFORMATION SHARING PROJECT Oregon State University ~ Information Services] "projections from 1995 to 2000 were derived from an annual econometric model, and these midterm projections were used to evaluate the projections for the first year of the long-term projections, which in this case, are the projections for 2000"

• Impact Studies: The Economic Impact of a University on a local Community; Mariners, the Arts, Boeing, the Port, and/or others

• Migration Impacts
  • Numerical Example

• Relevance of "Impact Perspectives" for (our) Concentrations and Projects

• Policy Implications:
  • Export Promotion and Export Substitution
  • Import Substitution
  • Infrastructure, Services & the Non-Basic Sector (Goodall)

• Evaluation and Critique
  • Multipliers and Structural Change; (Growth vs. Development)
  • Mercantilist Bias
  • Need for Spatial Specificity
  • Need for Organizational (and other) Specificity

• Resources:
  • National Income and Product Accounts [Virginia: Geo-Spatial and Statistical Data Center]
  • Economic Impact Studies
  • Economic Base Concept [www.public.asu.edu/~subhro/pup622/econanal/]
  • Tim Chapin's Economic Base Analysis Page
  • Introduction to Econ Base Multipliers
  • Structural Change and Import Substitution in Chicago. Report Date: April 1992 Author(s): Joseph Persky, Virginia Carlson. Rising Import Shares in Chicago ....
  • References to Local Impacts:
    • Microsoft's Impacts
    • Boeing's Impacts

• Literature:

  Alexander C. Vias and Gordon F. Mulligan, Integrating Economic Base Theory with Regional Adjustment Models: The Nonmetropolitan Rocky Mountain West Growth and Change, Volume 30, Number 4, Fall 1999 [Abstract]

  Anderson, Robert J., "A Note on Economic Base Studies and Regional Econometric Forecasting Models," Journ. of Regional Science 10(3), 1970, pp.325ff.

  Weiss, Steven J. and Edwin C. Gooding, Estimation of Differential Employment Multipliers in a Small Regional Economy," Land Economics 44(2), May 1968, 235ff.