september 14, 2004 1 growth and development of cities: week 4. urban economy urbs 310
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Growth and Development of Cities: Growth and Development of Cities: Week 4. Urban EconomyWeek 4. Urban Economy
URBS 310URBS 310
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Urban Growth (O’Sullivan)Urban Growth (O’Sullivan)
• Comparative advantage
• Scale Economies in Transportation and Trading Cities
• Internal scale economices
• Agglomerative economies
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Comparative AdvantageComparative Advantage
• Trade between regions become advantageous. Trade causes development of cities.
• Determines whether trade is beneficial or not.
• Principle of opportunity cost.
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Comparative AdvantageComparative Advantage
• Suppose that East and West agree to exchange 2 yards of cloth for one bushel of wheat.
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Comparative AdvantageComparative Advantage
• The net gain of the West from trade is one bushel of wheat.
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Scale Economies in TransportationScale Economies in Transportation
• The cost per unit per mile decreases as the volume transported increases. So it is cheaper to transport wheat and cloth in bulk.
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Internal Scale EconomiesInternal Scale Economies
• A reduction in a company’s average costs of production as output increases.
Scale Economies in Clothmaking
0
0.25
0.5
0 200 400 600 800
Volume of cloth (yards)
Labo
r ti
me
(hou
rs p
er y
ard)
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Agglomerative EconomiesAgglomerative Economies
• Why are some cities large?
• By locating close to one another, firms can produce at a lower cost. (positive externality in production: the produdction cost of a particular firm decreases as the production of other firms incraeses).
• Two types of agglomerative exonomies.
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Localization EconomiesLocalization Economies
• The production cost of a particular firm decreases as “industrywide output” increases
• Three sources
– If there are scale economies in the production of an intermediate good, firms share a supplier of an intermediate input and form a cluster around the input supplier.
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Localization EconomiesLocalization Economies
• Three sources
– If output per firm varies from year to year, a cluster of firms facilitates the transfer of workers. (labor market pooling)
– A cluster of firms improves communication, rapid exchange of information, and the diffusion of innovations (knowledge spillovers)
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Urbanization EconomiesUrbanization Economies
• The produdction cost of a particular firm decreases as “total output of the urban area” increases.
• Result from the sharing of input suppliers (business services & public services), labor-market economies, and communication economies.
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Globalization and Urban GrowthGlobalization and Urban Growth
• General Agreement on Trade and Tariffs (GATT)… reduce trade barriers (60% in 30s, 5% in 70s).
• Major effect: manufacturing. Side effect is the weakening of labor unions.
• What about services? Programming work in India, U.S. hospitals having medical transcription done in India. Insurance claims processing would be candidates for “outsourcing”, “offshoring”.
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Urban Economic Analysis: Urban Economic Analysis: ApproachesApproaches
• Judgmental Approach
• Extrapolation of Trends
• Ratio-Share
• Component Techniques (Economic Base, Input-Output, Regression Models, Econometrric Models)
• Joint Economic-Population Projections
• Normative Economic Projections
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Judgmental ApproachJudgmental Approach
• Produces forecasts by polling a panel of experts (Delphi)
• Used in conjunction with one of technical approaches
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Ratio-Share TechniquesRatio-Share Techniques
• The ratio, step-down, approach is used for two reasons: 1) dependence of local economies on the national and international economy increases 2) national or large area projections are available
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Ratio-Share TechniquesRatio-Share Techniques
• Shift-Share Analysis:
– 1) the national growth component
– 2) national industry shift component
– 3) the competitive shift component
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Ratio-Share TechniquesRatio-Share Techniques
• Shift-Share Analysis:
– 1) the national growth component (N) +
– 2) national industry shift component (M)
– 3) the competitive shift component (S)
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Ratio-Share TechniquesRatio-Share Techniques
• Growth of Movie Industry of LA, 1990-2000 (MLA9000):
– 1) N = MLA90 (Tnation00 / Tnation90 – 1) +
– 2) M = MLA90 (Mnation00 / Mnation90 – Tnation00 / Tnation90 ) +
– 3) S = MLA90(MLA00 / MLA90 – Mnation00 / Mnation90 )
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Ratio-Share TechniquesRatio-Share Techniques
• Growth of Movie Industry of LA, 1990-2000 (MLA9000):
– 1) N = MLA90 (Tnation00 / Tnation90 – 1) +
– 2) M = MLA90 (Mnation00 / Mnation90 – Tnation00 / Tnation90 ) +
– 3) S = MLA90(MLA00 / MLA90 – Mnation00 / Mnation90 )
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Ratio-Share TechniquesRatio-Share Techniques• Quiz 1: Estimate three components of
1979-89 growth of local computers sector using shift-share analysis.
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Ratio-Share TechniquesRatio-Share Techniques
• Projection of Movie Industry of LA, 2000-2010 (MLA0010):
– N = MLA00 (Mnation10 / Mnation00) +
– S = MLA00(MLA00 / MLA90 – Mnation00 / Mnation90 )
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Ratio-Share TechniquesRatio-Share Techniques• Assessment
– Conceptually and computationally straightforward, easily accessible data, fast and reasonably accurate projections
– Instability in the regional (local) competitive component.
– The simpler constant shift-share model seems acceptable in many cases. Appropriate for long term baseline forecasts
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Component MethodsComponent Methods
• Economi-Base Analysis– Basic Sector: entirely dependent on
factors external to local economy. Manufacturing firms, mining, federal and state governments.
– Non-basic Sector (Population Serving Jobs): dependent on local economic conditions. Drycleaners, restaurants, and drug stores. Economic base technique assumes that all local economic activities can be identified as basic or non-basic.
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Component MethodsComponent Methods
• Base Multiplier: Ratio of the total local employment in year t, to the total basic employment in that year.
BM = etT/ bt
T
• Quiz 2.– Total local employment: 15,000 and Total
base employment: 10,000. What is the base multiplier?
– If the base employment is projected to be 18,000, what is the projected total local employment, given the previous base multiplier?
• Stability or Trending?
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How to Determine Basic EmploymentHow to Determine Basic Employment
• Assumption– Simplest
– Assumptions
• Location Quotient– Compare the local economy to
regional/national economy. Measure the relative specialization of the region in selected industry sectors.
• Minimum Requirements– Compare the local economy with the
economy of a sample of similarly sized regions
–
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Location QuotientLocation Quotient
• Developed by Hildebrand and Mace (1950)
• Widely used and Widely criticized
• Ratio of an industry’s share of the local economy to the industry’s share of the national economy
LQi = (eti /et
T ) / (Eti /Et
T ),
where eti = regional employment in industry i in year t, et
T = total regional employment in year t, Et
i = national employment in industry i in year t, Et
T = total national employment in year t
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Location QuotientLocation Quotient
• LQ > 1: the region is more specialized than the nation in the agriculture
• LQ < 1: the region is less specialized than the nation in the agriculture
• LQ = 1: the region and the nation specialize to an equal degree in agriculture
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Location QuotientLocation Quotient
• Quiz 3: Compute the location quotient for employment in agriculture. Interpret the results.
Employment in
Agriculture
Total Employment
Local 150 260
Nation 10,000 24,000
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Input-OutputInput-Output• Wassily Leontief (1936,1951). Tracks the
intricate web of production linkages among different industries in the region.
• Suppliers
– Intermediate suppliers: purchase inputs for processing into the outputs they supply
– Primary suppliers: do not need to purchase inputs to make what they supply
• Purchasers
– Intermediate purchasers: buy the outputs of suppliers for use as inputs for further processing
– Final purchasers: buy the outputs of suppliers in their final form and for final use.
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OthersOthers
• Joint Economic-Population Approach
• Normative Economic Projection: based on goals and objectives
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Sources of DataSources of Data
• Census Bureau (Dept. of Commerce)
• Bureau of Labor Statistics ( Dept. of Labor)
• Bureau of Economic Analysis (Dept. of Commerce)
• Employment Development Department ( California State)
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Optional Assignment 3Optional Assignment 3(Due on 9/28)(Due on 9/28)
1. Estimate three components of 1979-89 growth of local computers sector using shift-share analysis.
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Optional Assignment 3Optional Assignment 3(Due on 9/28)(Due on 9/28)
2.– Total local employment: 15,000 and
Total base employment: 10,000. What is the base multiplier?
– If the base employment is projected to be 18,000, what is the projected total local employment, given the previous base multiplier?
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Optional Assignment 3Optional Assignment 3(Due on 9/28)(Due on 9/28)
3. Compute the location quotient for employment in agriculture. Interpret the results.
Employment in
Agriculture
Total Employment
Local 150 260
Nation 10,000 24,000