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

September 14, 2004September 14, 2004 11

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

URBS 310URBS 310


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

• Comparative advantage

• Scale Economies in Transportation and Trading Cities

• Internal scale economices

• Agglomerative economies


Comparative AdvantageComparative Advantage

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

• Determines whether trade is beneficial or not.

• Principle of opportunity cost.



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



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


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.


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)


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.


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.


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)


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.


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”.


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


Judgmental ApproachJudgmental Approach

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

• Used in conjunction with one of technical approaches


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



• Shift-Share Analysis:

– 1) the national growth component

– 2) national industry shift component

– 3) the competitive shift component



• Shift-Share Analysis:

– 1) the national growth component (N) +

– 2) national industry shift component (M)

– 3) the competitive shift component (S)



• 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 )



• 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 )


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

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



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

– N = MLA00 (Mnation10 / Mnation00) +

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


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


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.


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?


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

–


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



• 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



• 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


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.


OthersOthers

• Joint Economic-Population Approach

• Normative Economic Projection: based on goals and objectives


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)


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.



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?



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

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

Documents

national growth component

urban economic analysis

communication economies

labormarket economies

urban area

particular firm

transportationthe cost

lower cost