Economic Base Analysis

Economic base analysis is a mainstay in economic geography and regional development. It stems from a simple theory of regional economic growth: that the growth of cities and regions is tied to their success in exporting goods and services beyond their borders.

Economic base analysis is a demand-driven theory that divides the regional economy into two sectors: a “basic” sector that fulfills demand originating from outside the region and a “nonbasic” sector that satisfies demand from within the region. The theory posits a strong and stable relationship between the basic and nonbasic sectors such that any change in the basic sector produces changes in the nonbasic sector sufficient to restore their proportional relationship. The relationship, or linkage, between the two sectors takes two forms. First, the nonbasic sector is assumed to supply the basic sector with many of the goods and services it needs to produce its exports. Second, workers in the basic sector demand a variety of residential goods and services (e.g., groceries, dry cleaning, utilities) that the nonbasic sector supplies. None of these residential goods and services would exist, according to the theory, in the absence of the basic sector.

The economic base model seeks to quantify the relationship between the basic (B) and nonbasic (NB) sectors that constitute the total economy (T). Typically expressed in terms of employment or earnings, the simplest economic base model is expressed as

Assuming a stable relationship in the basic-nonbasic ratio, nonbasic activity is proportionately related to total activity, or

Substituting (2) into (1) and rearranging yields

where a is the propensity to spend locally. The term [1/(1–a)], equal to T/B, is called the economic base impact multiplier. While the basicnonbasic relationship is theorized to be stable over time, it is not assumed to be the same across all regions.

Typically, the economic base model is used for economic impact analysis. Suppose, for example, that a region successfully attracts a new manufacturing plant that will employ 300 people and sell to national markets. Furthermore, suppose the regional impact multiplier to be 1.75. With sufficient excess capacity, the total impact on the region would be (300 × 1.75) = 525 jobs, that is, 300 jobs in the basic sector and 225 jobs in the supporting nonbasic sector.

A critical step in economic base analysis involves dividing the regional economy into basic [Page 847]and nonbasic sectors, a process called bifurcation. The four most commonly discussed methods for identifying exports are assignment, surveys of local businesses, the location quotient method, and the minimum requirements approach. There are also several variations and hybrid approaches.

The assignment method simply relies on the analyst's judgment about which sectors, or portions thereof, serve external markets. It is common for federal government, agriculture, mining, and manufacturing to be assigned to the basic sector since activity in these sectors is usually exogenous to the region, especially in small or rural areas. Though there is no theoretical basis for the assignment method, a knowledgeable analyst might produce a reasonably accurate description of the region's economic base. At the other end of the spectrum is a complete survey of businesses in the area to determine what portion of their output is sold to customers residing outside the region. Because complete surveys are costly, partial surveys are sometimes used to inform the assignment method.

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