Economic Analysis
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Objective of chapter:
to discuss two levels of economic analysis
in a market study.
 the local economic base analysis the
macro base analysis the product
characteristics
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Economic Analysis (contd.)
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Expected study results:
▪ understand the elements of local economic base
that must be analysed in a market study;
▪ understand how the macro base variables could
possibly influence the development of a particular
site, particularly, in terms of property supply and
demand;
▪ understand how product characteristics influence
demand;
▪ incorporate the analyses into the market study.
Microeconomic Base Analysis
sometimes called the local economic base
analysis
 widely used to generate primary data for
the real estate market study
 local industries and economic activities that
generate employment and income in the
area
 General population growth and decline in an
area may be considered a function of
employment opportunities.
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Why economic base analysis?
to gain an understanding of the economic
strengths and weaknesses of the
community
 => comparative economic advantage
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How EBA is conducted?
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identify the resources and productive capacity of
an area => what it can produce
Identify employment in the area
generate of income that will be spent on real
property
Create market segmentation
translate the local economic base data into a
demand projection for the subject site
=> housing, office, retail, recreational, and
industrial space
Local Sources of Employment
Circular Flow of Local Economy
The Local Economy
Local economy is divided into households
and businesses
 Households => production resources
 Busineses => basic or non-basic goods/
services
 Basic goods/services: those exported to
outside area
 Non-basic goods/services: those sold to and
consumed by the local community
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The Local Economy (cont.)
Basic employment industries: export
industries that make money flowing into
the local economy
 E.g. agriculture and/or manufacturing
 Non-basic employment industries: those
consuming goods/services from the
“basic”
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Analysis of Local Economy
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Two main indicators:
Employment Multiplier Analysis (EMA)
Location Quotient Analysis (LQA)
EMA is used to analyse how population multiplies
as employment grows
LQA is used to measure the relative degree of
economic status of a defined geographic area
* an “exporter”, “importer”, or some balance
between the two
* employer of basic employment, employer of nonbasic employment, or some balance between the
two
Employment Multiplier Analysis
T = B + NB
 k = T/B
 m = NB/B
 NB = T - B
where T = total employment, B = number
of
workers in basic employment, NB = number
of workers in non-basic employment, k =
employment multiplier, m = employment
multiplier.
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Employment Multiplier Analysis (cont.)
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E.g.
T = 45,000
B = 15,000
 k = 45,000/15,000 = 3
 m = (45,000 – 15,000)/15,000 =
1.67
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What these figures indicate?
Employment Multiplier Analysis (cont.)
The use of employment multiplier:
* predicts change in total employment and
population
* predicts global demand for property
 Basic calculation:
k = cT/cB
cT = k x cB
where k, T, and = as defined earlier, c means
“change”
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Employment Multiplier Analysis (cont.)
 = 0.863, cB = 5,200.
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Assuming ,
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The expected change in total employment
(cT) can be calculated as follows:
 = cT/cB
cT =  x cB
cT = 0.863 x 5,200
= 4,488
Employment Multiplier Analysis (cont.)
Assume population in the work force is 38%
 The multiple of people per worker
(population multiplier,қ), can also be
calculated as:
қ = 1.00/.38
= 2.6316
 Expected increase in population resulting
from the change in basic employment:
қ x cT
= 2.6316 x 4,488 = 11,811
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Employment Multiplier Analysis (cont.)
From additional 11,811people, we can
estimate the global demand
 => Lab 3 discussion (last week!)
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Location Quotient
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LQi = (LEi / LEt ) x (NEt / NEi)
where
LQi = location quotient for industry i;
LEi = local employment in industry i;
LEt = total local employment in all industries;
NEt = total national employment;
NEi = national employment in industry i.
Location Quotient (cont.)
A location quotient > 1.0: local industry is
producing export goods.
 A location quotient < 1.0: local economy
probably imports goods that are produced
outside the area and that non-basic
employment accounts for more local jobs
than basic employment.
 A location quotient = 1.0: the community
produces an amount equal to what is locally
consumed.
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Location Quotient (cont.)
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E.g.
LEi in manufacturing = 10,000
LEt in manufacturing = 350,000
NEt in manufacturing = 2,550,000
NEi in manufacturing = 1,052,600
LQ = (10,000/350,000) x
(2,550,000/1,052,600)
= 0.0286 x 2.4226
= 0.07
Macroeconomic Analysis
Population size
 Age
 Household size
 Labour force
 Education
 Per Capita Income
 Interest rate
 Loan facilities
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Gross Domestic
Product
 Consumer price index
 Availability of Savings
 Capital gains and
rentals
 Cost factor
 Government
regulations
 Market Factors
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Thank you!