Growth and Development of Cities: Week 4. Urban Economy

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Growth and Development of Cities Week 4. Urban
Economy

• URBS 310

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Urban Growth (OSullivan)

• Comparative advantage
• Scale Economies in Transportation and Trading
  Cities
• Internal scale economices
• Agglomerative economies

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Comparative 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 Advantage

• Suppose that East and West agree to exchange 2
  yards of cloth for one bushel of wheat.

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Comparative Advantage

• The net gain of the West from trade is one bushel
  of wheat.

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Scale 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 Economies

• A reduction in a companys average costs of
  production as output increases.

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Agglomerative 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 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 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 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 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 Approaches

• 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 Approach

• Produces forecasts by polling a panel of experts
  (Delphi)
• Used in conjunction with one of technical
  approaches

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Ratio-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 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 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 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 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 Techniques

• Quiz 1 Estimate three components of 1979-89
  growth of local computers sector using
  shift-share analysis.

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Ratio-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 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 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 Methods

• Base Multiplier Ratio of the total local
  employment in year t, to the total basic
  employment in that year.
• BM etT/ btT
• 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 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 Quotient

• Developed by Hildebrand and Mace (1950)
• Widely used and Widely criticized
• Ratio of an industrys share of the local economy
  to the industrys share of the national economy
• LQi (eti /etT ) / (Eti /EtT ),
• where eti regional employment in industry i in
  year t, etT total regional employment in year
  t, Eti national employment in industry i in
  year t, EtT total national employment in year t

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Location Quotient

• LQ gt 1 the region is more specialized than the
  nation in the agriculture
• LQ lt 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 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-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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Others

• Joint Economic-Population Approach
• Normative Economic Projection based on goals and
  objectives

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Sources 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 3(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 3(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 3(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