September 14, 2004 1 Growth and Development of Cities: Week 4. Urban Economy URBS 310.

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Growth and Development of Cities: Growth and Development of Cities: Week 4. Urban EconomyWeek 4. Urban Economy

URBS 310URBS 310

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Urban Growth (O’Sullivan)Urban Growth (O’Sullivan)

• Comparative advantage

• Scale Economies in Transportation and Trading Cities

• Internal scale economices

• Agglomerative economies

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Comparative AdvantageComparative Advantage

• Trade between regions become advantageous. Trade causes development of cities.

• Determines whether trade is beneficial or not.

• Principle of opportunity cost.

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Comparative AdvantageComparative Advantage

• Suppose that East and West agree to exchange 2 yards of cloth for one bushel of wheat.

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Comparative AdvantageComparative Advantage

• The net gain of the West from trade is one bushel of wheat.

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Scale Economies in TransportationScale Economies in Transportation

• The cost per unit per mile decreases as the volume transported increases. So it is cheaper to transport wheat and cloth in bulk.

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Internal Scale EconomiesInternal Scale Economies

• A reduction in a company’s average costs of production as output increases.

Scale Economies in Clothmaking

0

0.25

0.5

0 200 400 600 800

Volume of cloth (yards)

Labo

r ti

me

(hou

rs p

er y

ard)

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Agglomerative EconomiesAgglomerative Economies

• Why are some cities large?

• By locating close to one another, firms can produce at a lower cost. (positive externality in production: the produdction cost of a particular firm decreases as the production of other firms incraeses).

• Two types of agglomerative exonomies.

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Localization EconomiesLocalization Economies

• The production cost of a particular firm decreases as “industrywide output” increases

• Three sources

– If there are scale economies in the production of an intermediate good, firms share a supplier of an intermediate input and form a cluster around the input supplier.

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Localization EconomiesLocalization Economies

• Three sources

– If output per firm varies from year to year, a cluster of firms facilitates the transfer of workers. (labor market pooling)

– A cluster of firms improves communication, rapid exchange of information, and the diffusion of innovations (knowledge spillovers)

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Urbanization EconomiesUrbanization Economies

• The produdction cost of a particular firm decreases as “total output of the urban area” increases.

• Result from the sharing of input suppliers (business services & public services), labor-market economies, and communication economies.

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Globalization and Urban GrowthGlobalization and Urban Growth

• General Agreement on Trade and Tariffs (GATT)… reduce trade barriers (60% in 30s, 5% in 70s).

• Major effect: manufacturing. Side effect is the weakening of labor unions.

• What about services? Programming work in India, U.S. hospitals having medical transcription done in India. Insurance claims processing would be candidates for “outsourcing”, “offshoring”.

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Urban Economic Analysis: Urban Economic Analysis: ApproachesApproaches

• Judgmental Approach

• Extrapolation of Trends

• Ratio-Share

• Component Techniques (Economic Base, Input-Output, Regression Models, Econometrric Models)

• Joint Economic-Population Projections

• Normative Economic Projections

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Judgmental ApproachJudgmental Approach

• Produces forecasts by polling a panel of experts (Delphi)

• Used in conjunction with one of technical approaches

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Ratio-Share TechniquesRatio-Share Techniques

• The ratio, step-down, approach is used for two reasons: 1) dependence of local economies on the national and international economy increases 2) national or large area projections are available

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Ratio-Share TechniquesRatio-Share Techniques

• Shift-Share Analysis:

– 1) the national growth component

– 2) national industry shift component

– 3) the competitive shift component

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Ratio-Share TechniquesRatio-Share Techniques

• Shift-Share Analysis:

– 1) the national growth component (N) +

– 2) national industry shift component (M)

– 3) the competitive shift component (S)

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Ratio-Share TechniquesRatio-Share Techniques

• Growth of Movie Industry of LA, 1990-2000 (MLA9000):

– 1) N = MLA90 (Tnation00 / Tnation90 – 1) +

– 2) M = MLA90 (Mnation00 / Mnation90 – Tnation00 / Tnation90 ) +

– 3) S = MLA90(MLA00 / MLA90 – Mnation00 / Mnation90 )

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Ratio-Share TechniquesRatio-Share Techniques

• Growth of Movie Industry of LA, 1990-2000 (MLA9000):

– 1) N = MLA90 (Tnation00 / Tnation90 – 1) +

– 2) M = MLA90 (Mnation00 / Mnation90 – Tnation00 / Tnation90 ) +

– 3) S = MLA90(MLA00 / MLA90 – Mnation00 / Mnation90 )

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Ratio-Share TechniquesRatio-Share Techniques• Quiz 1: Estimate three components of

1979-89 growth of local computers sector using shift-share analysis.

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Ratio-Share TechniquesRatio-Share Techniques

• Projection of Movie Industry of LA, 2000-2010 (MLA0010):

– N = MLA00 (Mnation10 / Mnation00) +

– S = MLA00(MLA00 / MLA90 – Mnation00 / Mnation90 )

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Ratio-Share TechniquesRatio-Share Techniques• Assessment

– Conceptually and computationally straightforward, easily accessible data, fast and reasonably accurate projections

– Instability in the regional (local) competitive component.

– The simpler constant shift-share model seems acceptable in many cases. Appropriate for long term baseline forecasts

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Component MethodsComponent Methods

• Economi-Base Analysis– Basic Sector: entirely dependent on

factors external to local economy. Manufacturing firms, mining, federal and state governments.

– Non-basic Sector (Population Serving Jobs): dependent on local economic conditions. Drycleaners, restaurants, and drug stores. Economic base technique assumes that all local economic activities can be identified as basic or non-basic.

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Component MethodsComponent Methods

• Base Multiplier: Ratio of the total local employment in year t, to the total basic employment in that year.

BM = etT/ bt

T

• Quiz 2.– Total local employment: 15,000 and Total

base employment: 10,000. What is the base multiplier?

– If the base employment is projected to be 18,000, what is the projected total local employment, given the previous base multiplier?

• Stability or Trending?

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How to Determine Basic EmploymentHow to Determine Basic Employment

• Assumption– Simplest

– Assumptions

• Location Quotient– Compare the local economy to

regional/national economy. Measure the relative specialization of the region in selected industry sectors.

• Minimum Requirements– Compare the local economy with the

economy of a sample of similarly sized regions

–

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Location QuotientLocation Quotient

• Developed by Hildebrand and Mace (1950)

• Widely used and Widely criticized

• Ratio of an industry’s share of the local economy to the industry’s share of the national economy

LQi = (eti /et

T ) / (Eti /Et

T ),

where eti = regional employment in industry i in year t, et

T = total regional employment in year t, Et

i = national employment in industry i in year t, Et

T = total national employment in year t

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Location QuotientLocation Quotient

• LQ > 1: the region is more specialized than the nation in the agriculture

• LQ < 1: the region is less specialized than the nation in the agriculture

• LQ = 1: the region and the nation specialize to an equal degree in agriculture

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Location QuotientLocation Quotient

• Quiz 3: Compute the location quotient for employment in agriculture. Interpret the results.

Employment in

Agriculture

Total Employment

Local 150 260

Nation 10,000 24,000

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Input-OutputInput-Output• Wassily Leontief (1936,1951). Tracks the

intricate web of production linkages among different industries in the region.

• Suppliers

– Intermediate suppliers: purchase inputs for processing into the outputs they supply

– Primary suppliers: do not need to purchase inputs to make what they supply

• Purchasers

– Intermediate purchasers: buy the outputs of suppliers for use as inputs for further processing

– Final purchasers: buy the outputs of suppliers in their final form and for final use.

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OthersOthers

• Joint Economic-Population Approach

• Normative Economic Projection: based on goals and objectives

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Sources of DataSources of Data

• Census Bureau (Dept. of Commerce)

• Bureau of Labor Statistics ( Dept. of Labor)

• Bureau of Economic Analysis (Dept. of Commerce)

• Employment Development Department ( California State)

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Optional Assignment 3Optional Assignment 3(Due on 9/28)(Due on 9/28)

1. Estimate three components of 1979-89 growth of local computers sector using shift-share analysis.

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Optional Assignment 3Optional Assignment 3(Due on 9/28)(Due on 9/28)

2.– Total local employment: 15,000 and

Total base employment: 10,000. What is the base multiplier?

– If the base employment is projected to be 18,000, what is the projected total local employment, given the previous base multiplier?

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Optional Assignment 3Optional Assignment 3(Due on 9/28)(Due on 9/28)

3. Compute the location quotient for employment in agriculture. Interpret the results.

Employment in

Agriculture

Total Employment

Local 150 260

Nation 10,000 24,000