III. THE ROLE OF ECONOMIC ANALYSIS
Economists see the urban structure as:
(1) A matrix of locations for firms: The economic city rests upon a division of labor among firms, involving competition and cooperation within the framework of the marketplace, which can be analyzed in terms of location theory, multiplier effects, economies of scale, and marginal economies of operations.
(2) An economic unit--as a super firm--based upon relations between buyers and sellers, contractors and subcontractors (with the household as the smallest firm), all involved in a giant export-import business.
o The city is a system that provides interaction for the production and consumption of goods.
o A number of subsystems must be identified and studied in order to more fully understand the total economic system and its interaction with other dimensions of the urban environment.
Several core areas of study may be identified within the field of urban economics:
(1) Structure and growth of the urban economy .The role as a component of the national economy--an element in a national system of cities.
(2) Intrametropolitan organization and change. The spatial dimensions of the urban economy, in terms of the organization of economic activities and their relation to the city form and the allocation of economic resources.
(3) Urban public services and welfare. The urban public economy, addressing problems associated with efficient allocation of public resources and the interaction of the public and private sectors.
(4) Economics and urban human resources. Households as suppliers of labor services in the urban market and the population as a consumer of final products of the economy.
(5) Regional accounts. Systematic organization of information needed for economic analysis.
Economic Impact Studies
Economic impact studies examine: (a) dollar inputs entering a regional economic structure; (b) the process of dollars circulating throughout the system; and (c) the process of dollars leaving the system as regional output and the total wealth generated and its distribution.
Economic inputs create: (a) economic impacts (employment, taxes, etc.), (b) political impacts (public revenues, service demands, etc.), and (c) physical impacts (spatial expansion and contraction, social diseconomies, pollution, etc.).
Thompson discusses economic impact in terms of five stages of urban growth: [1]
(1) Export specialization--the local economy is dominated by one firm or several firms from the same industrial category. Secondary economic activities are highly dependent upon the economic well-being of the principal industry.
(2) Export complex--economic system is broadened and new industries, customers, and/or local suppliers are added Critical linkages exist between basic industries and their suppliers and customers.
(3) Economic maturity is reached when imports are replaced by new "own use" or "home grown" productive activities.
(4) Regional metropolis--the localized economy becomes a node connecting and controlling neighboring cities in its hinterland. The export of services becomes a major economic function.
(5) Technical-professional virtuosity-- the economic system has achieved national eminence in some specialized economic function.
Economic growth may hesitate and stagnate between any of these stages if the momentum at the end of a phase is not strong enough to carry the economy to the next stage.
Thompson introduces the concept of the "urban ratchet"--when the urban economy reaches a size in which certain functions are "locked-in", it will not slip backward.
Input-Output Analysis
Under input-output (IO) analysis, the economic structure of a community or region is defined and measured in terms of an inter-industry system or matrix.
Input-output analysis seeks to model the technological interrelationships of production and distribution in the economy through a system of simultaneous equations.
Each line of economic activity bears measurable relationships to every other economic activity in the region, which can be set forth in a series of equations--a huge revenue expenditure accounting system or transaction table. [2]
Widespread application of this approach has been hampered by the lack of adequate models and data deficiencies.
I/O analysis is relatively expensive and difficult to do and often is accepted as a precise and flawless tool--which it is not.
o I/O analysis assumes that the economic structure (supply channels and production costs) remains constant over extended time periods.
o Without frequent (and costly) revisions, an I/O analysis rapidly becomes dated in a changing economy.
Income and Product Accounts
Income and product accounts involve a system of double-entry bookkeeping, established on the basis of asset changes without tracing interchanges in physical inventories.
Income and product accounts have been applied primarily in the study of the national economy.
o In national accounts, closure in the economic system can be achieved by introducing a "rest-of-the-world" (ROW) account.
o This approach has several pitfalls at the regional or urban scale, because boundaries must be established arbitrarily and may cut across important ties with other regions.
The economy is seen as a mechanism for the production of goods and services for final disposi-tion as: (a) export sales, (b) private investment in industry and business, (c) govern-ment purchases, and (d) household consumption.
Total income is the sum of exogenous and endogenous income.
A regional multiplier (K) can be applied to determine the impact of shifts in either local economic activity or total income:
K = 1/1 - Y/T
where Y is the value added in the local market and T is total income (100 percent).
The multiplier may be modified in making projections if new lines of activity are introduced into a region or other events lead to changes in its relative competitive advantages.
Economic Base Studies
Cities survive by selling products or services to the "outside world," thereby gaining the wherewithal with which to pay for indispensable imports, i.e., goods and services not produced in the local economy [3]
Economic base studies divide the urban economy into two broad categories:
(1) Basic or Export Industries--those industries producing goods and services (and capital) for distribution to markets outside a defined local economic area; and
(2) Nonbasic or Service Industries--those producing goods and services that are consumed within the local economic area (see Exhibit 2).
The underlying assumption is that expansion of basic activities usually results in growth of service activities and thus, growth in the total economy.
Exhibit 2. Urban Economic Structure: Classification by Market Location & Consume Commodity
I. Export (Basic)
A. Movement of commodity (goods, services, and/or capital) to consumers or purchasers
1. High Export (80% to 100%)
2. Low Export (50% to 80%)
B. Movement of consumers of purchases to commodity
1. High Export (80% to 100%)
2. Low Export (50% to 80%)
II. Local (Nonbasic)
A. Importation of commodities (goods, services, and/or capital) for local fabrication and/or local distribution.
1. High Local (80% to 100%)
2. Low Local (50% to 80%)
B. Local origination of commodity for local fabrication and/or local distribution
1. High Local (80% to 100%)
2. Low Local (50% to 80%)
C. Subsidiaries: Businesses that enter into sales arrangements with firms of either base or local market; few sales to final or household consumers
1. Base subsidiaries
2. Local market subsidiaries
Andrews has suggested that a "purely" basic or nonbasic industry is a rarity--industries serve a mixture of export and local markets and may be more basic or more nonbasic but seldom exclusively so. [4]
Employment data of some firms must be apportioned between the basic and nonbasic sectors.
Andrews suggests that a distinction be made between those firms in which 80 to 100 percent of their sales is either export-oriented or locally oriented (high export or high local) and those in which 50 to 80 percent of their sales has such identifiable orientations.
Where the boundaries of the economic base area are drawn can influence the determination of what activities are basic and what activities are service or local-oriented.
Homer Hoyt observed that when employment is used as a measure, a ratio occurs between basic and nonbasic activities. Empirical studies have shown that this ratio varies over a relatively narrow range of from 1 to 0.5 to 1 to 2 (with the base activity computed as the constant).
These multipliers have been used in making population projections, as well as projections of employment and economic activities (assuming a constant or predictably changing ratio).
Employment data are also used to calculate location quotients, sometimes called coefficients of localization or specialization.
Solving the following equation for X determines the number of workers that would be employed in industry i if the community produced just enough of that industry's product to supply its own needs. [6]
X (divided by) Total Local Employment = National Employment in Industry i (divided by) Total National Employment
If actual employment is in excess of X, then industry i may be assumed to be export oriented; if actual employment is below X, then products of this industry are assumed to be imported.
Economic base multipliers and location quotients can be generated for various units of measurement, including: (1) employment data, (2) payrolls, (3) value added, (4) value of production, (5) physical production, and (6) dollar income and expenditure accounts. [7]
Output per worker (productivity) may increase without parallel increases in employment; rise in productivity may be associated with an increase in the rate and total wage assigned to individual jobs.
Payrolls data are open to significant price change adjustments but may provide a clue to a community's standard of living if these data can be obtained in terms of annual distributions.
Physical production, value added, and value of production do not apply to all sectors and therefore have limited application. Value added and value of production may be clouded by complex price movements and may encounter problems with intangible inputs and value products.
Dollar income and expenditures accounts, in combination with employment data, provide the most comprehensive measure of economic activity. The complexity and difficulty of tracing monetary transactions, coupled with data problems, limit the application of these measures.
Much of the appeal of economic base studies stems from their simplistic application, which can also lead to fallacious and contradictory results.
o While basic industries are necessary for urban growth and development, it does not follow that this alone is sufficient for growth and development.
o The service component may be more important as an indicator of growth potential than the basic component. [8]
Applicability of the economic base approach tends to decrease with increasing size of the urban center and tends to increase with increasing specialization and division of labor between centers. [9]
Large, highly diverse metropolitan centers survive and grow because highly developed and diverse business and consumer services enable such centers to attract new basic industries to offset those that may decline.
Economic Dominants Analysis
Economic dominants may be export or local in their market orientation and, as industry groups, claim an arbitrary minimum proportion of total area employment--3%, 4% or 5% depending on the local economic structure (and cost constraints of conducting the study).
This approach based on the hypothesis that the quantitative and qualitative character of the total urban economy can be understood through a continuing study of those industries or economic activity groups that dominate the area in terms of employment and other strategic factors. [10]
Selected economic dominants (industry groups) are subjected to:
(a) Macroanalysis--national, regional, and state level analyses of dominant industry group economic trend characteristics;
(b) Microanalysis--detailed economic examination of a sample of local firms within each dominant industry groups; and
(c) Integration of macro and micro findings to determine the nature and degree of deviation between the performance of firms at the local level and trends of the same industry groups at national, regional, and state levels.
Across-the-board integration of selected industry group data is accomplished by means of: (1) formal analytical identification of primary linkage relationships among export and ancillary (local) dominants industry groups at the local level; and (2) summation of the individual dominants on an employment basis for the current year.
Subdominant industry groups also may be identified--industry groups whose employment shares are just below the minimum level of dominants but still of significant size--because they represent an underlying "seedbed" of established economic activity. [11]
Summary
The urban economy has been studied primarily in terms of three conceptual systems--input-output analysis, income product accounts analysis, and economic base studies.
As data sources become more extensive and more refined, and as the data handling capacity of computers receives wider utilization, it is likely that the "rough edges" of these three models will be smoothed away so that they nearly fit as a single system of analysis. When this is accomplished, the integration of broader theoretical concerns of economics will be possible.
Endnotes
[1] Wilbur Thompson, A Preface to Urban Economics (Washington, D.C.: Resources for the Future, 1963).
[2] Wassily W. Leontief, The Structure of the American Economy, 1919-1939 (Oxford: Oxford University Press, 1951), p. 11.
[3] Thompson, op. cit., chapter 1.
[4] Richard D. Andrews, "Mechanics of the Urban Economic Base," Land Economics (November 1953), pp. 344-49; "Urban Economics: An Appraisal of Progress," Land Economics (August 1961), pp. 223-225; "Economic Planning for Small Areas: An Analytical System," Land Economics (May 1963), pp. 145-155; "Economic Planning for Small Areas: The Planning Process," Land Economics (August 1963), pp. 253-264.
[5] William J. Reilly, The Law of Retail Gravitation (New York: G.P. Putnam Sons, 1931)
[6] Charles M. Tiebout, The Community Economic Base Study (New York: Committee for Economic Development, 1962), p. 47.
[7] Andrews, "Economic Planning for Small Areas: The Planning Process," Land Economics (August 1963), pp. 253-264.
[8] Ralph W. Pfouts, "An Empirical Testing of the Economic Base Theory," Journal of the American Institute of Planners (Spring 1957).
[9] Hans Blumenfeld, "The Economic Base of the Metropolis," Journal of the American Institute of Planners (Fall 1955).
[10] Andrews, "Economic Planning for Small Areas: An Analytical System," Land Economics (May 1963), pp. 143-155.
[11] Ibid., p. 151.