Chapter 6 Structural Interrelations in the Local

Economy

Charles M. Tiebout

The Community Economic Base Study

Economic Base & The Settlement System

The RegionExports

Imports

Local MultiplierEffects

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)EX

• 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

consumptionIncome Change = (Change in Export +

Investment Income) x (1/1-apcL 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-apcL x income/$ local consumption sales + apiL x income/$ local investment sales)

Example: $1 x (1/(1-.5*.4+.2*.5)) = (1/(1-.2-.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:155.9-110.9 = 45.0

Imports to Consumption & Other F.D. 49.1

Natural Resources

Manufacturing & Construction Services Subtotal Consumption Exports Other F.D.

Total Sales

Natural Resources 0.6 1.9 0.3 2.8 0.7 4.8 0.2 8.5Manufacturing & Construction 0.8 8.5 9.5 18.8 4.8 77.4 27.3 128.3Services 2.3 15.3 53.2 70.8 97.4 73.7 12.6 254.5Subtotal 3.7 28.4 63.1 95.1 102.9 155.9 37.5 391.3Labor Income 2.4 30.7 94.2 127.3 0.0 7.1 18.1 152.5Other Value Added 1.6 5.0 51.5 58.1 20.2 0.7 1.5 80.5Imports 0.9 64.2 45.8 110.9 40.7 0.0 8.4 160.0Total Purchases 8.5 128.3 254.5 391.3 163.8 163.6 65.5 784.3

What evidence to we have on local income to total income

Local PCE/Total Labor Income

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

1963 1967 1972 1982 1987 1997 2002

Local PCE/Total LaborIncome

How has local consumption changed as income levels have

changed?

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

1963 1967 1972 1982 1987 1997 2002

0

2000

4000

6000

8000

10000

12000

14000

Local PCE/Labor Income

Per capita Income ($1972)

Unstable ratios?: Output Multiplier Correlations

Correlation weakens with time

Correlations

1 .929** .890** .794** .831** .748** .621**

. .000 .000 .000 .000 .000 .001

25 25 25 25 25 25 25

.929** 1 .889** .810** .820** .757** .582**

.000 . .000 .000 .000 .000 .002

25 25 25 25 25 25 25

.890** .889** 1 .880** .901** .847** .595**

.000 .000 . .000 .000 .000 .002

25 25 25 25 25 25 25

.794** .810** .880** 1 .953** .915** .666**

.000 .000 .000 . .000 .000 .000

25 25 25 25 25 25 25

.831** .820** .901** .953** 1 .928** .678**

.000 .000 .000 .000 . .000 .000

25 25 25 25 25 25 25

.748** .757** .847** .915** .928** 1 .685**

.000 .000 .000 .000 .000 . .000

25 25 25 25 25 25 25

.621** .582** .595** .666** .678** .685** 1

.001 .002 .002 .000 .000 .000 .

25 25 25 25 25 25 25

Pearson Correlation

Sig. (2-tailed)

N

Pearson Correlation

Sig. (2-tailed)

N

Pearson Correlation

Sig. (2-tailed)

N

Pearson Correlation

Sig. (2-tailed)

N

Pearson Correlation

Sig. (2-tailed)

N

Pearson Correlation

Sig. (2-tailed)

N

Pearson Correlation

Sig. (2-tailed)

N

MULT63

MULT67

MULT72

MULT82

MULT87

MULT97

MULT02

MULT63 MULT67 MULT72 MULT82 MULT87 MULT97 MULT02

Correlation is significant at the 0.01 level (2-tailed).**.

Import Substitution? Mix of Overall PCE

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1963 1967 1972 1982 1987 1997 2002

Imports to WA P.C.E.

Value Added P.C.E.

Washington P.C.E.

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: apcL x income per $ of local consumption sales

• Expanded terms in the long run model: exports private + to the federal government. Entering the multiplier: apcL 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