Economic Analysis Objective of chapter: Objective of chapter: to discuss two levels of economic analysis in a market study. to discuss two levels of economic analysis in a market study. the local economic base analysis the macro base analysis the product characteristics the local economic base analysis the macro base analysis the product characteristics

Expected study results: Expected study results: ▪ understand the elements of local economic base that must be analysed in a market study; ▪ understand how the macro base variables could possibly influence the development of a particular possibly influence the development of a particular site, particularly, in terms of property supply and site, particularly, in terms of property supply and demand; demand; ▪ understand how product characteristics influence demand; ▪ incorporate the analyses into the market study. Economic Analysis (contd.)

Microeconomic Base Analysis sometimes called the local economic base analysis sometimes called the local economic base analysis widely used to generate primary data for the real estate market study widely used to generate primary data for the real estate market study local industries and economic activities that generate employment and income in the area local industries and economic activities that generate employment and income in the area General population growth and decline in an area may be considered a function of employment opportunities. General population growth and decline in an area may be considered a function of employment opportunities.

Why economic base analysis? to gain an understanding of the economic strengths and weaknesses of the community to gain an understanding of the economic strengths and weaknesses of the community => comparative economic advantage => comparative economic advantage

How EBA is conducted? identify the resources and productive capacity of an area => what it can produce identify the resources and productive capacity of an area => what it can produce Identify employment in the area Identify employment in the area generate of income that will be spent on real property generate of income that will be spent on real property Create market segmentation Create market segmentation translate the local economic base data into a demand projection for the subject site translate the local economic base data into a demand projection for the subject site => housing, office, retail, recreational, and industrial space => housing, office, retail, recreational, and industrial space

Local Sources of Employment Circular Flow of Local Economy

The Local Economy Local economy is divided into households and businesses Local economy is divided into households and businesses Households => production resources Households => production resources Busineses => basic or non-basic goods/ Busineses => basic or non-basic goods/ services services Basic goods/services: those exported to outside area Basic goods/services: those exported to outside area Non-basic goods/services: those sold to and consumed by the local community Non-basic goods/services: those sold to and consumed by the local community

Basic employment industries: export industries that make money flowing into the local economy Basic employment industries: export industries that make money flowing into the local economy E.g. agriculture and/or manufacturing E.g. agriculture and/or manufacturing Non-basic employment industries: those consuming goods/services from the “basic” Non-basic employment industries: those consuming goods/services from the “basic” The Local Economy (cont.)

Analysis of Local Economy Two main indicators: Two main indicators: Employment Multiplier Analysis (EMA) Employment Multiplier Analysis (EMA) Location Quotient Analysis (LQA) Location Quotient Analysis (LQA) EMA is used to analyse how population multiplies as employment grows EMA is used to analyse how population multiplies as employment grows LQA is used to measure the relative degree of economic status of a defined geographic area LQA is used to measure the relative degree of economic status of a defined geographic area * an “exporter”, “importer”, or some balance * an “exporter”, “importer”, or some balance between the two between the two * employer of basic employment, employer of non- * employer of basic employment, employer of non- basic employment, or some balance between the basic employment, or some balance between the two two

Employment Multiplier Analysis T = B + NB T = B + NB k = T/B k = T/B m = NB/B m = NB/B NB = T - B NB = T - B where T = total employment, B = number of where T = total employment, B = number of workers in basic employment, NB = number of workers in non-basic employment, k = workers in basic employment, NB = number of workers in non-basic employment, k = employment multiplier, m = employment employment multiplier, m = employment multiplier. multiplier.

E.g. E.g. T = 45,000 T = 45,000 B = 15,000 B = 15,000  k = 45,000/15,000 = 3  k = 45,000/15,000 = 3  m = (45,000 – 15,000)/15,000 = 1.67  m = (45,000 – 15,000)/15,000 = 1.67 What these figures indicate? What these figures indicate? Employment Multiplier Analysis (cont.)

The use of employment multiplier: The use of employment multiplier: * predicts change in total employment and * predicts change in total employment and population population * predicts global demand for property * predicts global demand for property Basic calculation: Basic calculation: k = cT/cB k = cT/cB cT = k x cB cT = k x cB where k, T, and = as defined earlier, c means “change” where k, T, and = as defined earlier, c means “change” Employment Multiplier Analysis (cont.)

Assuming,  = 0.863, cB = 5,200. Assuming,  = 0.863, cB = 5,200. The expected change in total employment (cT) can be calculated as follows: The expected change in total employment (cT) can be calculated as follows:  = cT/cB  = cT/cB cT =  x cB cT =  x cB cT = x 5,200 cT = x 5,200 = 4,488 = 4,488 Employment Multiplier Analysis (cont.)

Assume population in the work force is 38% Assume population in the work force is 38% The multiple of people per worker (population multiplier, қ ), can also be calculated as: The multiple of people per worker (population multiplier, қ ), can also be calculated as: қ = 1.00/.38 қ = 1.00/.38 = = Expected increase in population resulting from the change in basic employment: Expected increase in population resulting from the change in basic employment: қ x cT қ x cT = x 4,488 = 11,811 = x 4,488 = 11,811 Employment Multiplier Analysis (cont.)

From additional 11,811people, we can estimate the global demand From additional 11,811people, we can estimate the global demand => Lab 3 discussion (last week!) => Lab 3 discussion (last week!) Employment Multiplier Analysis (cont.)

Location Quotient LQi = (LEi / LEt ) x (NEt / NEi) LQi = (LEi / LEt ) x (NEt / NEi) where LQi = location quotient for industry i; LEi = local employment in industry i; LEt = total local employment in all industries; NEt = total national employment; NEi = national employment in industry i.

A location quotient > 1.0: local industry is producing export goods. A location quotient > 1.0: local industry is producing export goods. A location quotient < 1.0: local economy probably imports goods that are produced outside the area and that non-basic employment accounts for more local jobs than basic employment. A location quotient < 1.0: local economy probably imports goods that are produced outside the area and that non-basic employment accounts for more local jobs than basic employment. A location quotient = 1.0: the community produces an amount equal to what is locally consumed. A location quotient = 1.0: the community produces an amount equal to what is locally consumed. Location Quotient (cont.)

E.g. E.g. LEi in manufacturing = 10,000 LEi in manufacturing = 10,000 LEt in manufacturing = 350,000 LEt in manufacturing = 350,000 NEt in manufacturing = 2,550,000 NEt in manufacturing = 2,550,000 NEi in manufacturing = 1,052,600 NEi in manufacturing = 1,052,600 LQ = (10,000/350,000) x (2,550,000/1,052,600) LQ = (10,000/350,000) x (2,550,000/1,052,600) = x = x = 0.07 = 0.07 Location Quotient (cont.)

Macroeconomic Analysis Population size Population size Age Age Household size Household size Labour force Labour force Education Education Per Capita Income Per Capita Income Interest rate Interest rate Loan facilities Loan facilities Gross Domestic Product Gross Domestic Product Consumer price index Consumer price index Availability of Savings Availability of Savings Capital gains and rentals Capital gains and rentals Cost factor Cost factor Government regulations Government regulations Market Factors Market Factors

Thank you! Thank you!