URP 4223 L-05-06 Measurement and Change in Regional
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URP 4223: Urban and Regional Economics Lecture-05-06: Measurement and Change in Regional Economic Activity: Regional Accounts, Theory of Regional Income and Trade 1 Course Teacher: Md. Esraz-Ul-Zannat Assistant Professor Dept. of URP, KUET February 09, 2014 ACKNOWLEDGEMENT These slides are aggregations for better understanding of the topic mentioned in the previous slide . I acknowledge the contribution of all the authors and photographers from where I tried to accumulate the info and used for better presentation. 2 TOPICS TO BE COVERED BY THIS PRESENTATION Regional Regional GDP Scope Components of Regional Accounts How to measure regional GDP The Direct Approach What method do we choose? Descriptive Regional Input-Out Analysis Trade Accounts Theory Trade Theories Theories of Trade Patterns Interventionist Theories Free Trade Theories Theories of Specialization Theory of country size 3 TOPICS TO BE COVERED BY THIS PRESENTATION Trade Theory Country-similarity Theory Trade Pattern Theories Factor proportions theory product life cycle theory The Porter Diamond theory New Trade Theory 4 REGIONAL ACCOUNTS 5 REGIONAL ACCOUNTS A comprehensive picture of the regional economic structure is vital for regional planning. One possible approach is through the development of regional accounts traditionally using a “Treble Entry” system with Income = Expenditure = Output. Development of accounts at the regional level is an essential perquisite before regional planning can be undertaken. Regional Accounts can also provide valuable basis for regional policy and decision making. There is also the point that regional accounts tend to focus on the wood and not the trees. Changes in the trees sometimes bring about substantial changes in the wood as 6 whole. REGIONAL ACCOUNTS Concentrating on the production sector, an industrial break down of a region, showing inter-industry relationships in the form of input-out matrix, may be more useful than income and expenditure components enabling us to see both the woods and the trees. 7 REGIONAL GDP SCOPE Annual GDP Current price (nominal) GDP By region and industry Using the production approach 8 COMPONENTS OF GDP Intermediate Consumption Compensation of Employees Operating Surplus and Consumption of Fixed Capital Net Indirect Taxes Output 9 HOW TO MEASURE REGIONAL GDP Two main approaches 1. Indirect Uses a variable with a regional dimension correlated with GDP, e.g. employment numbers wages paid 2. Direct Based on direct surveying of units and their transactions. Builds up GDP in the same way that the national accounts are compiled. 10 ISSUES WITH DIRECT APPROACH Units with regional dimension needed Complex Depends on data availability Heavy data requirements More expensive than alternatives Not particularly timely Still preferred method though 11 THE DIRECT APPROACH Direct is preferred because It reflects national accounts methods Allows estimation by unit Avoids assumptions such as constant employment to value added ratios Allows us to compile individual aggregates by summing source data 12 WHAT METHOD DO WE CHOOSE? No existing economic collection is completely suitable for estimating regional GDP Method will be data driven It requires assessing What source data might be suitable Where the gaps are Costs of filling the gaps The most appropriate methodological choice 13 DESCRIPTIVE REGIONAL INPUT-OUT ANALYSIS input-output analysis creates a picture of a regional economy describing flows to and from industries and institutions Input-Output Analysis is an accounting framework Input-Output analysis can be used to predict changes in overall economic activity as a result of some change in the local economy Provides a description of a local economy Predictive model to estimate impacts Uses mathematical matrix models 14 INPUT-OUTPUT REGIONAL ANALYSIS Examines the complete interdependence between outside export sales, purchases from other industries, and internal consumption. Study of sales exported by each industry Who bought What? How was it purchased? Where did it come from? Study of purchases by each industry Interconnection of all parts of the economy. Input-Output Assumptions Constant returns to scale production function -i.e., linear Homogeneous sector output No input substitution No supply constraints 15 SIMPLE INPUT-OUTPUT FLOW TABLE FOR ONE AREA 16 OUTLINE FRAMEWORK FOR A TWO REGION INPUT-OUTPUT TABLE Basically previous table Basically previous table 17 OUTLINE FRAMEWORK FOR A MULTI-REGIONAL INPUT-OUTPUT TABLE 18 TRADE THEORY 19 WHAT IS TRADE (INTERNATIONAL)? Regional/International trade is the exchange of capital, goods, and services across regional (international) borders or territories. Trade mainly have two components EXPORTS and IMPORTS. 20 WHY TRADE THEORIES? The first purpose of trade theory is to explain observed trade. That is, we would like to be able to start with information about the characteristics of trading region/countries, and from those characteristics deduce what they actually trade, and be right. That’s why we have a variety of models that postulate different kinds of characteristics as the reasons for trade. Secondly, to know about the effects of trade on the regional/domestic economy. A third purpose is to evaluate different kinds of policy and decision making. 21 LAISSEZ-FAIRE VS. INTERVENTION Trade theory helps answer………. What products should we import and export? How much should we trade? With whom should we trade? Laissez-faire Free trade theories – absolute advantage and comparative advantage Intervention approach approach Mercantilism and neomercantilism 22 THEORIES OF TRADE PATTERNS Theories country size factor proportions country similarity Theories explore explore trade competitiveness Product life cycle Porter Diamond theory 23 THEORY OF TRADE PATTERNS Porter Diamond theory Specialization Theory Factor theory of country Size proportion theory Country similarity theory 24 WHAT THE MAJOR TRADE THEORIES DO AND DON’T DISCUSS 25 INTERVENTIONIST THEORIES Theories that support government intervention in the flow of trade Mercantilism Neomercantilism 26 MERCANTILISM AND NEOMERCANTILISM Mercantilist theory proposed that a country should try to achieve a favorable balance of trade (export more than it imports) trade surplus Avoid an unfavourable balance of trade trade deficit Neomercantilist policy also seeks a favorable balance of trade, but its purpose is to achieve some social or political objective Neomercantilism run an export surplus to achieve social or political objectives 27 FREE TRADE THEORIES Two theories that support free trade Absolute advantage theory Absolute Advantage is the ability to produce something more efficiently than any other region/country can. Comparative advantage theory Comparative advantage is the ability to produce some product more efficiently or better than other products Market forces should determine trade specialization 28 THEORY OF ABSOLUTE ADVANTAGE Absolute advantage different countries produce some goods more efficiently than others Suggests specialization through free trade because consumers will be better off if they can buy foreign-made products that are priced more cheaply than domestic ones A country may produce goods more efficiently because of a natural advantage or because of an acquired advantage Free trade brings Specialization Natural advantage Acquired advantage product technology process technology Greater efficiency Higher global output 29 THEORY OF ABSOLUTE ADVANTAGE Production Possibilities under Conditions of Absolute Advantage 30 THEORY OF COMPARATIVE ADVANTAGE Also proposes specialization through free trade because it says that total global output can increase even if one country has an absolute advantage in the production of all products Theory of comparative advantage free trade can increase global output even if one country has an absolute advantage in the production of all products 31 THEORY OF COMPARATIVE ADVANTAGE Production Possibilities under Conditions of Comparative Advantage 32 THEORIES OF SPECIALIZATION Both absolute and comparative advantage theories are based on specialization Theories of specialization make assumptions that may not be valid full employment economic efficiency division of gains two countries, two commodities transport costs statics and dynamics services production networks mobility 33 HOW MUCH DOES A COUNTRY TRADE? Theory large countries depend less on trade than small countries Large of country size countries usually export a smaller portion of output and import a smaller part of consumption have higher transportation costs for foreign trade 34 COUNTRY-SIMILARITY THEORY Most trade today occurs among high-income countries because they share similar market segments and because they produce and consume so much more than emerging economies Much of the pattern of two-way trading partners may be explained by cultural similarity between the countries, political and economic agreements, and by the distance between them 35 TRADE PATTERN THEORIES How much a country will depend on trade if it follows a free trade policy What types of products countries will export and import With which partners countries will primarily trade 36 WHAT DOES A COUNTRY TRADE? Factor proportions theory A country’s relative endowments of land, labor, and capital will determine the relative costs of these factors Factor costs will determine which goods the country can produce most efficiently factors in relative abundance are cheaper than factors that are relatively scarce But production factors are not homogenous labour Process technology capital versus labour 37 PRODUCT LIFE CYCLE (PLC) THEORY Companies will manufacture products first in the countries in which they were researched and developed, almost always developed countries Over the product’s life cycle, production will shift to foreign locations, especially to developing economies as the product reaches the stages of maturity and decline The product life cycle theory the production location of certain manufactured products shifts as they go through their life cycle Four stages 1. 2. 3. 4. Introduction Growth Maturity Decline 38 LIFE CYCLE OF THE INTERNATIONAL PRODUCT 39 THE PORTER DIAMOND THEORY Four conditions as important for competitive superiority: 1) demand conditions 2) factor conditions 3) Related and supporting industries 4) firm strategy, structure, and rivalry 40 LIMITATIONS OF THE PORTER DIAMOND THEORY Capital and labor move internationally to gain more income and flee adverse political situations Although international mobility of production factors may be a substitute for trade, the mobility may stimulate trade through sales of components, equipment, and complementary products 41 NEW TRADE THEORY Emerged in the 1970’s when economists questioned the assumption of diminishing returns to specialization When substantial economies of scale are present, the returns on specialization will result in increased productivity and lower unit costs ability to enhance economies of scale increases Trade is mutually beneficial because it allows for the: specialization of production realization of scale economies and “learning effects” greater variety of goods produced decrease in the average costs of goods 42 ECONOMIES OF SCALE AND FIRST MOVER ADVANTAGE Industries with high fixed costs require a substantial proportion of the world demand to spread fixed costs over a large volume and to utilize specialized assets World market may only support a few competitors First Mover Advantage economic and strategic advantages to early entrants ability to capture economies of scale and low cost structure scale-based cost advantage can create entry barriers 43 IMPLICATIONS OF NEW TRADE THEORY Nations may benefit from trade even when they do not differ in resource endowments or technology A nation may predominate in the export of a good simply because it has one or more firms among the first to produce that good which creates entry barriers Those economies of scale that result from first mover advantage translate into a comparative advantage Some argue that it justifies government intervention and strategic trade policy 44 WHAT WE HAVE COVERED…. Regional Regional GDP Scope Components of Regional Accounts How to measure regional GDP The Direct Approach What method do we choose? Descriptive Regional Input-Out Analysis Trade Accounts Theory Trade Theories Theories of Trade Patterns Interventionist Theories Free Trade Theories Theories of Specialization Theory of country size 45 WHAT WE HAVE COVERED…. Trade Theory Country-similarity Theory Trade Pattern Theories Factor proportions theory product life cycle theory The Porter Diamond theory New Trade Theory 46 WHAT WE LEARNT Understanding of the regional accounts, its importance and different kind of trade theories. 47 48 SO THAT’S REGIONAL ACCOUNTS AND TRADE THEORY 49 What Next? Lecture 6: Regional Policy: The National Interest and Regional Objective 50
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