Chapter 6 Structural Interrelations in the Local Economy Charles M. Tiebout The Community Economic Base Study

Economic Base & The Settlement System The Region Exports Imports Local Multiplier Effects

The Time Factor in Community Studies Static vs. dynamic perspectives Short-run analysis vs. long-run analysis The simple base model E = (1/1-alpha)E X Assumptions: short-run analysis: 3 sectors: exports, local investment, local consumption In the short-run, exports and local investment are “given” or fixed (time horizon : up to 2 years)

The Local Consumption Sector – Short-run analysis Resident spending on local consumption Income earned by the local sales $ The multiplier process for local consumption Income Change = (Change in Export + Investment Income) x (1/1-apc L x income/$ local consumption sales) Example: $1 x (1/1-.5*.4) = 1/(1-.2) = $1.25

Assumptions: Long Run Analysis Time horizon greater than 2 years As exports change (grow), this leads to greater investment to support growth in output Thus, investment becomes endogenous to the multiplier calculation: Income change = Change in Export Income x 1/(1-apc L x income/$ local consumption sales + api L x income/$ local investment sales) Example: $1 x (1/(1-.5*.4+.2*.5)) = (1/( ) = 1/.7 = $1.43

Local Consumption Sector Issues (1) How closely related is local consumption to total local income (2) Local consumption to total income ratios go up, go down, or we don’t know (3) Empirical evidence proves these ratios are unstable (4) The model does not allow for import substitution (5) The ratio varies among communities

Washington I/O Table ($ billions) Net industrial exports are roughly offset by imports to industries and categories of final demand (households, investment, and state and local governments) Industrial Exports Industrial Imports Net Industrial Exports: = 45.0 Imports to Consumption & Other F.D. 49.1

What evidence to we have on local income to total income

How has local consumption changed as income levels have changed?

Unstable ratios?: Output Multiplier Correlations Correlation weakens with time

Import Substitution? Mix of Overall PCE

The behavior of other sectors Local housing investment Business investment Local government investment Local government current operations

An Expanded Model Expanded terms in the short-run model: private exports, exports to the federal government, local business investment, local housing investment, local government investment, local government operations; Entering the multiplier: apc L x income per $ of local consumption sales Expanded terms in the long run model: exports private + to the federal government. Entering the multiplier: apc L x income per $ of local consumption sales, local business investment, local housing investment, local government investment, local government operations

What are “Basic” Sectors? “Basic industries are those whose level of activity is not clearly tied to the level of economic activity in the local community.” In the short-run this can be activities except exports In the long-run, exports are the fundamental force for regional growth/change BUT: growth can come without expansion of exports: “the world has growth without exports to outer space”. Via productivity change that leads to growth in per capita income