In the previous unit, you examined how location quotients (LQs) are used to quantify concentration of industries in an area.
In this unit, you will learn how to model the economic activity of your region, using a simple, two-sector model known as Economic Base Theory. Modeling allows analysts to make predictions about likely impacts of economic events on industries and employment.
The following definitions will prove helpful as you view the videos in this unit:
- Basic Industry: Those industries that produce goods and services ultimately sold to consumers outside the region.
- Non-basic Industry: Those industries that produce goods and services that are consumed locally.
- Multiplier: The ratio of total economic activity to basic economic activity.
Following the video lectures, a brief exercise will allow you to apply these concepts to a simplified real-world scenario.
- An economic model is useful because it does the following:
- Provides an explanation for how the regional economy works.
- Offers important insights into changes taking place in the local economy.
- Indicates how the regional economy can generate greater prosperity.
- Economic Base Theory is the name of the modeling technique introduced in this unit.
- The economic base model is built upon the simple, intuitive notion that a regional economy is based upon a particular industry and all other industries flourish by serving this sector.
- Think, for example, of California’s Silicon Valley. The economy of San Jose and its surrounding cities is based upon the electronics and computer industry, and the chips and devices produced are exported beyond the region.
- The electronics/computer industry is therefore basic to the region.
- Other (non–basic) industries, such as restaurants, hotels, and retail stores thrive by serving and supporting the basic (computer and electronics) industry.
Completing this unit will equip you to do the following:
- Identify the core components of economic base theory.
- Perform a simple modeling exercise for a region using the economic base model.