53 terms

# Economic Forecasting

#### Terms in this set (...)

Descriptive Analysis of Industry Structure
The purpose of this initial analysis of the urban/regional economy is to examine recent development trends, individually and by comparison to the state or national economy.
Descriptive tools include:
1. Employment shares and rates (eg, employment rate, unemployment rate, industry share in total employment)
2. Location Quotient
3. Localization Coefficient
4. Economic Base Model (AKA export base model)
Location Quotient
- Indicates the degree to which the local area specializes in an industry (or the extent to which the industry is concentrated in the area), relative to a comparison region (such as the state or nation).
- Indirect method of defining economic base and is the most popular.
- Can be used widely on various data types such as employment, income, output, and consumption.
- Data are easy to find and formula is simple to calc.
- Will ALWAYS underestimate export workers
Calculating Location Quotient
LQ= %LocalEmp/%NationalEmp
%Local Emp = LocalEmpIndustry/TotalLocalEmp
%NationalEmp = NationalEmpIndustry/TotalNationalEmp

Centers on the number 1.
- A result of 1 means that the industry's local share of the economy is equivalent to the same industry's share of the national economy.
- Less than 1 indicates the local share is less compared to the national, and the area does not specialize in that industry.
-Greater than 1 has a local share greater than compared to national, that the area dos specialize in that industry, and is therefore considered a basic sector industry
Example of Location Quotient
The basic industries of the region are identified by comparing employment in the region to national norms.
- If the national norm for employment in car manufacturing is 5 percent and the region's employment is 8 percent, then 3 percent of the region's car employment is basic.
--> Once basic employment is identified, the outlook for basic employment is investigated sector by sector and projections made sector by sector.
--> In turn, this permits the projection of total employment in the region. Typically the basic/non-basic employment ratio is about 1:1.
Localization Coefficient
AKA: Index of similarity or Index of Dissimilarity
- Since there are as many location quotients as industries, it is cumbersome to compare the industrial structure of two regions using these quotients.
- This provides a single number as an indicator of two areas similarity of industrial structure.
- The LC may assume values between 0 and 1
--> A value of 0 indicates that the two areas have an identical industry distribution
--> Value of 1 indicated that the two areas have a a totally dissimilar industry distribution
Economic Base Analyses
Developed by Robert Murray Haig in his work on the Regional Plan of New York in 1928.
- Used for both determining the impact of a change in the economy and for predicting future growth.
- Divides regional industries into basic (export) and non-basic (local service industries) sectors.
- Assumes that basic sector drives the economy.
Basic Sector assumptions
Idea that it drives the economy is based on two assumptions: 1. Exports from a region give the region a competitive economic edge.
2. Exports produce a multiplier effect that is beneficial to the local economy.
- The nonbasic sector produces goods for local consumption and is a function of the city's basic sector
Empirical Approach to Economic Base Analyses
AKA Assumption Method
Assigns industries into basic and non-basic sectors through assumptions on each industry, as well as good knowledge of the economy.
- For instance, most ag and manufacturing jobs were traditionally assumed to be basic, because the goods were sent away once produced.
Economic Base Multiplier
With the base sector activity and the total economic activity of a study area, it can be applied to measure local economic growth.
- It can be based on employment, output, or income.
It is calculated as follows:
EBM= TotalEconomicActivity/BaseSectorActivty.
- A result of 3 would mean that for every basic job, three non-basic jobs are needed/created in the economy.
Minimum Requirements Approach to Economic Base Analyses
Variant of the Location Quotient Method
- Defines each industry's local employment requirements by reference to areas in which the respective industries are unimportant and make up a small share in total employment.
- Utilizes an outside study area for reference and calibration.
- It assumes that a regional economy will completely meet its own local demand before any exports are made.
- Any employment utilized above the meeting of local needs is considered to be in the basic sector.
- All others are non-basic by default.
Survey Method to economic base analysis
Identifies export workers based on an establishment survey.
- Out of all the EBA methods, this is the only one that correctly IDs an area's direct export employment.
- Disadvantage of this method is that it is expensive and when a survey is undertaken additional data can usually be generated at little extra cost that make more sophisticated modeling approaches possible
Limitation of Economic Base Analysis
It's simple approach produces limitations:
- It doesn't account for demographics, which produces skewed results.
-No spatial orientation.
- Therefore, as the size of the study area grows, the economic base declines because the comparison is usually to the National economy.
- Most were developed before the "information age " and have difficultly accounting for telecommuting.
- Almost exclusively demand-side economic models
Shift-share Analysis
Descriptive technique for analyzing sources of change in the regional economy by looking at the national share, industry mix, and regional shift.
- A ways to evaluate the strengths and weaknesses of a region's industries and Provides a picture of how well a region's mix of industries is performing
- Some use this for forecasting, but it is not advisable.
- One downside is that it doesn't discount the effect of abnormal events, like natural disasters and labor management disputes.
How to calculate shift share analysis
Data needed for analysis include:
- total employment for the local area for the current year and an earlier year
- total employment for the state or nation
- industry employment totals at the 1 or 2 digit Standard Industrial Classification (SIC) level for the local area
- industry employment totals SIC level for the state or nation.

To calculate
- add three variables (national share, industry mix, and regional shift) together.
- To calculate change, add the change factor in the appropriate variable in the formula.
National Share
Used in shift-share analysis.
- Share of regional job growth attributable to growth of the national economy
- Overall employment growth rate of all industries in a large area is multiplied by total employment in a specific industry in a small area in the base year.
- Simply shows the extent to which the national economy grows or declines.
Industry Mix
Used in shift-share analysis.
- Estimates relative change in employment in a given industry based on the difference in growth rates between said industry nationally and the entire national economy.
- Calcs how much growth can be attributed to the region's mix of industries.
- When aggregated across all industries, shows whether the mix of industries in the region are growing or declining relative to the national economy.
Regional Shift
Used in shift-share analysis.
- Estimates change in employment in a given industry in the region based on the difference in growth rates between said industry in the region and the same industry nationally.
- Calcs how many jobs are created/not created as a result of the region's competitiveness
- Shows if your region is strong or lagging in a given industry relative to the nation.
Benefit/Cost Analysis
Use as a way to estimate the costs and benefits of a proposed large development project, government program, or regulation.
- Should be straightforward - accept a proposal if the benefits exceed the costs.
- However, should just be used as a guide as it does not provide conclusive evidence of all costs or benefits because it is difficult to put a dollar value on environmental costs and benefits.
- Goal: To select projects with greatest net present value, indicating the highest return on investment. If the project shows a negative net present value, the project should be avoided entirely.
Problems with Benefit/Cost analysis
1. What benefits and costs should be included? Should include all, but we cant because we don't know what they all are.
2. How should benefits and costs be measured?
3. How do we account for the time value of money? Unadjusted comparison tends to over-value benefits.
4. The ratio can be manipulated.
Total Costs of a Project Over its Lifetime and the Annualized Cost of a Project
Alternative to benefit-cost analysis.
- These two costs can be used to compare two or more projects that will provide identical benefits.
- However, if the benefits of the alternative projects are not identical, then cost/benefit analysis must be used.
Planning Balance Sheets
Alternative to benefit-cost analysis.
- An evaluation matrix, with competing projects forming rows and evaluation criteria forming columns.
- With a little creativity, it can evaluate economic, social, and environmental criteria on both short- and long-term basis.
- These criteria can be difficult to quantify in terms of money, and thus hard to include in cost benefit analysis.
Goals Achievement Matrix
Alternative to benefit-cost analysis.
- A goals achievement matrix is only a simple variation of a planning balance sheet.
- The various socioeconomic groups that competing projects could cost or benefit for the table's columns, instead of the evaluation criteria found in planning balance sheets.
Cost Effectiveness Analysis (CEA)
Usually used to compare two competing projects that will provide roughly the same benefits.
- More complicated that comparing total or annualized costs.
- Like benefit-cost analysis, it discounts to present value.
Present value
Tells us when (today, next year, ten years) the benefits and costs of a proposed program will be realized.
- The timing is important because a dollar received today is more valuable to us than a dollar received ten years from now (even if there is no inflation) because it can be deposited and can gain interest.
- To transform future benefits and costs into comparable terms, we determine today's equivalent PV of each amount. (in other words, we discount future benefits to reflect the value of time money).
--> The appropriate benefit/cost approach is to adjust all cash flows to their equivalent values in a particular year.
Why calculate Present Value
Adjust all costs for the current, PV, instead of at the middle or the end of the project because:
1. It is the same year for all projects (which may have diff end periods)
2. It results in a uniformity of calculations
3. It is the sensible way to consider a decision being made not to commit present funds.
Present Value equation
PV = Future Value/(1+discount rate) [AKA PV=FV(1+i)]
Discount rate
Used when calculating Present Value
- Selection of the rate is crucial decision.
- A choice of a higher rate can easily change a benefit cost comparison from positive to negative.
- Some argue that the correct rate is the value of money to the private sector. Correct rate should represent the opportunity costs to invest in the private sector.
Input-Output Economic Analysis
Focuses on intermediate sales between an economy's sectors, or the circular flow in the economy.
- It is based more of an accounting methodology than a theory (unlike economic base analysis).
- It is used to study an economy's structure and to project that structure into the future.
- Divides the economy's activity into groups, classified as economic actors:
1. Primary Suppliers
2. Intermediate Suppliers
3. Intermediate Purchasers
4. Final Purchasers
- Performing this analysis is very difficult, costly, and time consuming, and doesnt produce sig better results than the economic base analysis.
Primary Suppliers
Part of Input-Output Economic Analysis.
They purchase no inputs for producing outputs.
- They are usually households, their output is usually labor, and they usually purchase only final goods.
Intermediate Suppliers
Part of Input-Output Economic Analysis.
- They sell their outputs to either intermediate or final purchasers.
Intermediate Purchasers
Part of Input-Output Economic Analysis.
- They buy outputs from others and use them as inputs to produce outputs.
- Intermediate purchasers and suppliers are the same.
Final Purchasers
Part of Input-Output Economic Analysis.
- They use their inputs as final goods (i.e., they consume them).
- Primary suppliers are not necessarily also final purchasers.
Input-Output Economic Analysis Assumption
Some are dubious:
- Economies of scale do not exist
- Available technology and quality of labor don't change
- Inputs of each industry's production cannot be substituted
- Each industry produces only one bundle of goods
- Each industry's consumption of input stays constant
- There are no national imports or exports
- An economy's total output equals its total product plus its intermediate sales
- Final demand is outside of the economy being analyzed
Fiscal Impact Analysis
AKA cost-revenue analysis.
- A projection of the direct, current public costs and revenues resulting from pop or employment change (usually resulting from a large, private dev project) to the local jurisdiction.
- Typically looks at the demands for new infrastructure, compared to the property taxes and sales taxes the project would generate.
Types of Fiscal Impact analysis
1. Per capita multiplier. Most common
2. Case study method.
3. Service Standard Method
4. Comparable City method. Rarely used
5. Proportional Valuation method. Used for nonresidential projects.
6. Employment Anticipation method. Used for nonresidential projects.
Per Capita Multiplier Method
One of the 6 kinds of fiscal impact analyses.
- The most commonly used.
- Its used for estimating the average costs of a proposed residential development and average school cost per pupil.
- Requires highly reliable population and school data.
- If positive, approve the project
- If negative, adjust inputs, such as fewer single-family, more multifamily (= less school children)
Net Present Value
Impact analysis technique.
- Used to show the net monetary value of a project, discounted to present vale. So, if the net present value of a proposed project will be greater than 0, then the monetary benefits outweigh its monetary costs.
Economic Efficiency
The use of natural resources is efficient of it produces the most output per unit of input, with the least amount of waste.
- Government is efficient if it maximizes general welfare of its constituents.
Internal Rate of Return
This impact analysis technique uses a variation of the net present value formula. A project's net present value formula is set to zero, and the interest variable is left blank. If the resulting interest variable is greater than the available market interest rate, then the project should be considered.
Valuing Nonrenewable Resources
Prices tend to follow a U-shaped path over time.
- Initially they are expensive to develop.
- Then they become abundant and prices fall, thanks to technology.
- Later as supplies dwindle, they become expensive again.
Valuing Renewable Resources
Tend to be initially abundant and cheap to exploit, but become more scarce and expensive over time as they resource is depleted.
Market Failures
Flaws in the price system, that may require government intervention to establish environmental quality standards and financial incentives:
1. Market prices do not include the external costs created in the processing and manufacturing of products.
2. Market prices may not accurately reflect the value of goods and the environment over time.
3. Market prices result in the underproduction of public goods.
4. Market is limited in its ability to allocate common property resources, and to account for situations of uncertainty and irreversibility.
5. The market is a voting system according to dollar votes, and wealth and income are not evenly distributed throughout society.
Pigouvian Tax
Way to compel companies to internalize their externalities.
- The tax forces companies to charge a price for their product that includes all health care costs of pollution, and other negative externalities.
Welfare Economics
Embodies the concept of equity or fairness.
- By consuming nonrenewable resources today, the current generation may well be reducing the ability of future generations to provide a quality standard of living.
Public Good
Something that society values, such as a city park.
- The private market has little incentive to provide public goods, hence, the park will create few public goods than society wants.
- Common for local governments to provide them instead.
Tragedy of the Commons
1968. When there are no clearly defined property rights, everyone has an incentive to use as much of the common property resource as they want.
- Leads to degradation or depletion.

Ex from the book is the commons of New England where people could graze their cattle.
Incremental Effects
Economics focuses on these, such as the effect on the price of a good caused by the cost of producing one more unit of a good.
- Known as marginal costs and benefits.
- Ideally, marginal costs equal marginal benefits, and both equal market price.
- Shortcoming: Market prices do not account for public health standards or "threshold effects." An economically efficient solution may impose unnecessary risks and premature deaths.
Threshold Effect
Is the amount of pollution that an ecosystem can absorb before it crashes and can no longer support life.
Contingent Valuation
Technique used to determine how much the public is willing to pay for environmental services.
- Done through a survey that asks taxpayers how much they would be willing to pay for an environmental benefit, such as buying 100 acres to give to a public park.
Economic and Market Analysis (forecast)
Establishes a sound basis for estimating short and long-term market demand for space and thus provides a basis for determining future land uses and transportation requirements.
Factors affecting the amount of future retail employment and space in a district
1. Retail activity is influenced by workers spending patterns. 2. Retail demand is affected by spending patterns of district residents. 3. A portion of retail activity results from attracting customers to sores offering high-quality goods, specialty items, and a wide array of general merchandise.
Retail activity forecasts and studies
Consider the factors influencing future retail employment and space and evaluate how they are likely to affect future spending in the district.
Cost-Revenue Analysis
A comparison of two money flows:
1. The amount any one section of the local community is paying into the local treasury through local taxes, etc.
2. The cost of services that local govt is providing to that sector
- Result is a statement of net municipal surplus of deficit expressed in financial terms.