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Economy Base Theory

Topic Summary
"Information about an area's future population is incomplete without a parallel understanding
of the local economy that largely shapes its future." (Klosterman, p. 113)
The above quote from Klosterman helps to illustrate the importance of coupling local
population estimates or forecasts to an in-depth knowledge of the local economy. Whereas
population projections function to estimate the number of persons in an area, these
projections do not provide any insight into the most important factor in local growth and
decline: the local economy. If the local economy is strong, as it has been in the Seattle
Metropolitan Area for the past several years, population growth is usually brisk. In times of
economic trouble, though, an area often will experience a loss in population- a direct result of
a stagnant economy.
Knowledge of the local economy usually results via analysis using a variety ofeconomic
base analytical techniques. Klosterman notes that the economic base technique "is the oldest,
simplest and most widely used technique for regional economic analysis." (p. 113) It is an
analytical method that illustrates many fundamental techniques used by local and regional
planners, including areal comparisons, local versus regional/national conditions, and
standardizing values.
The Economic Sectors
The economic base technique is grounded in the assumption that the local economy can be
divided into two very general sectors: 1) a basic (or non-local) sector or 2) anon-basic (or
local) sector.
Basic Sector: This sector is made up of local businesses (firms) that are entirely
dependent upon external factors. For example, Boeing builds and sells large airplanes
to companies and countries located throughout the world. Their business is dependent
almost entirely upon non-local firms. Boeing does not sell planes to families or
households locally, so their business is very much dependent upon exporting their
goods. Manufacturing and local resource-oriented firms (like logging or mining) are
usually considered to be basic sector firms because their fortunes depend largely
upon non-local factors, they usuallyexport their goods.
Non-basic Sector: The non-basic sector, in contrast, is composed of those firms that
depend largely upon local business conditions. For example, a local grocery store
sells its goods to local households, businesses, and individuals. Its clientele is locally
based and, therefore, its products are consumed locally. Almost all local services (like
drycleaners, restaurants, and drug stores) are identified as non-basic because they
depend almost entirely on local factors.
Economic Base Theory assumes that all local economic activities can be identified as basic or
non-basic. Firms that sell to both local and an export market must, therefore, be assigned to
one of these sectors or some means of apportioning their employment to each sector must be
employed. Means of assigning firms to basic and non-basic sectors will be discussed in the
various techniques outlined below.
The Importance of the Economic Base
Why is the basic/non-basic distinction important? Economic Base Theory asserts that the
means of strengthening and growing the local economy is to develop and enhance the basic
sector. The basic sector is therefore identified as the "engine" of the local economy.
"The economic base technique is based on a simple causal model that assumes that the basic
sector is the prime cause of local economic growth, that it is the economic base of the local
economy." (Klosterman, p. 115)
Economic Base Theory also posits that the local economy is strongest when it develops those
economic sectors that are not closely tied to the local economy. By developing firms that rely
primarily on external markets, the local economy can better insulate itself from economic
downturns because, it is hoped, these external markets will remain strong even if the local
economy experiences problems. In contrast, a local economy wholly dependent upon local
factors will have great trouble responding to economic slumps.
The Base Multiplier
The method for estimating the impact of the basic sector upon the local economy is the Base
Multiplier. The base multiplier is calculated via the following ratio:
Base Multiplier = Total Employment Year i

Basic Employment Year i
Simply stated, the Base Multiplier can provide insight as to how many non-basic jobs are
created by one base job. An example below:
Base Multiplier = Total Employment Year i =15,000 =1.90

Basic Employment Year i
In this example, locality X has a Base Multiplier of 1.90. This multiplier estimates that for every
one Basic Sector job created, 0.90 Non-basic Sector jobs are created (or for every 10 basic
sector jobs we would expect 9 non-basic sector jobs). The non-basic jobs are usually in the
form of personal/business services or related-goods employment.
A Local Example: Some estimates have placed Boeing's impact (a firm which provides
predominately basic sector employment) at over 4 non-basic jobs for every 1 Boeing job. Their
Base Multiplier would be something on the order of 4.3. How can this be? For every Boeing job
created to help build airplanes, a job may be created in another manufacturing sector (for
airplane parts not made by Boeing, for example), a job may be created in office services that
have Boeing as a client (a human resources agency, for example), and perhaps two jobs in
personal services (a restaurant job and a job at a local drug store, for example). Now these
jobs are not directly tied to that one specific Boeing job in that if that Boeing job is phased out
one day the other jobs will not exist the next day. But, ultimately, Boeing's employment is a
major factor in the number of business and personal services offered in the area. If Boeing
cuts its workforce by several thousand, the local economy will likely lose a far greater number
of jobs, on the order of four for every one of Boeing's.
Economic Base Analysis can be performed by way of several different techniques. However,
each of these techniques is based upon general Economic Base concepts like the assignment
of firms to basic or non-basic sectors and the calculation of a base multiplier (or multipliers).
Other Important Considerations
Prior to introducing the different economic base analysis techniques, a few other general
points should be mentioned. Klosterman identifies two key decisions that need to be made at
the beginning of this analytical process.
1) Identify your study area: It is important to note that the "local economy" means different
things to different people. As a planner for the city of Redmond, for example, the local
economy may mean your city's economy as compared to the regions. In contrast, if you were
working for the Puget Sound Regional Council, you would likely be comparing the
metropolitan economy to that of the West or even the Nation as a whole. What this suggests to
planners is that one should be sure to identify the boundaries of the local economy versus the
external world. It is also important to note that this will have a significant impact upon your
results as the economic base model is grounded upon the distinction between the local and
the external economies.
2) Select Your Measurement Units: Economic base analysis usually is undertaken using
Employment data. This unit of analysis, the number of jobs, is most common because
employment data is available from the Census Bureau. However, these same techniques can
be used on other economic units like Payroll and Sales and Value Added.
Lastly, a brief mention of data availability is necessary. Most economic data for use in
economic base analysis is taken from the US Census Bureau's County Business Patterns.
This data is collected annually and it provides employment and payroll information for
counties and cities throughout the United States. To organize this employment and payroll
data, a Standard Industrial Classification was developed by the U.S. Office and Management
and Budget. For more information on this classification, go to the SIC Code page. Gathering
and using this data, the analyst can utilize the various economic base techniques to determine
the strengths, weaknesses, and overall form of the local economy.
Economic Base Analysis Techniques
There are any number of ways to analyze the strengths/weaknesses, specializations, and
overall diversity of the local economy. The three techniques below offer planners a set of
simple, but popular tools to perform such analyses. These techniques also illustrate core
principles underlying the quantitative analysis of data by the planning profession.
I. Assumption Technique: The Assumption Technique is by far the simplest economic analysis
tool available to planners. This method estimates local Basic sector employment by using a
fundamental set of assumptions
about the local economy.
II. Location Quotient Technique: A step up in complexity, the Location Quotient Technique
determines the level of Basic sector employment by comparing the local economy to the
economy of a larger geographic unit like the State or the entire United States.
III. Minimum Requirements Technique:Lastly, the Minimum Requirements Technique is the
most complex economic base analysis method. This method compares the local economy with
the economies of a sample of similarly sized regions.
Economic Base Projection Techniques
Once the local economy has come to be understood in more depth, often a planner's attention
turns toward the future. What projections can be made about the local economy? To address
this question, techniques related to the above methods have been developed. Again, these
techniques are not solely related to economic base analysis, but, rather, illustrate some of the
guiding principles when making projections of any kind.
I. Constant-Share Projection Technique: This technique assumes a local share of region's
activity for individual industries will remain constant into the future. Like the Location Quotient
technique above, a larger reference region is used, in this case, to project future economic
II. Shift-Share Projection Technique: This technique adds some complexity to the Constant
Share Projection Technique. The Shift-Share method adds a "shift" factor to the equation to
attempt to account for the movement of jobs into or out of the local economy due to factors
affecting the local economy.
Key Concepts
Basic versus Non-basic sectors: Exports versus Imports
Why the Basic Sector is considered more important to the local economy
The Base Multiplier: Interpretation, Calculation
Local Conditions/Examples
Defining your geographic and measurement units
Data sources/SIC Codes
Lessons to be Learned
The Urban Planning profession is intimately tied to both population and economic
considerations (and many others, of course). Counting persons and households is
essential to understanding the future and prospects for an area. Equally important is
an understanding of the strengths, weaknesses, and changes within the local
economy. Economic Base Theory provides a framework for understanding the local
economy and points towards several techniques for analyzing the local economy.
The techniques that have developed from this theory attempt to translate general
principles concerning the local economy into calculable and tangible evidence about
that economy. It is essential to understand the power and the limitations of this
In summary, then, Economic Base Theory provides an overall framework to
understand and specific tools to analyze the local economy. However, these methods
should only be used with a clear understanding of what information is generated
through an application of these techniques and what information isnot provided
through an application of these techniques.
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