Regional Economics
Introduction to Basic Concepts
Pam Perlich
URBPL 5/6020: Urban & Regional Planning Analysis
University of Utah
Regional or Spatial Economics
• Economic Geography adds the dimension of
geography to economic analyses
• Focus on location of industries, housing,
commerce, public institutions over time
• Key concepts: proximity, concentration,
dispersion, comparative spatial patterns
• Concerned with trade flows, labor flows, and
resource flows, among others
Relevance to Urban Planners
• All planning efforts are financially constrained
• Planning practices and zoning have economic costs and
consequences
– Property values; government revenues; transportation,
environmental, and other impacts
• Market for land is not a “free” market, but is heavily
regulated
• Spatial arrangement of cities
– Has economic consequences, positive and negative
– Travel and other costs
• Urban planners can benefit from an understanding of
– their regional and local economic contexts
– How their proposed policies impact but are also impacted by
economic constraints and conditions
Levels of Geography
• Economic geography
– Global production patterns and trade
– Unit of analysis: nation state and multinational
corporate enterprises
• Regional economics
– Generally sub-national
– May be rural or urban
– Activity within a region may be analyzed at a
small scale
– BEA defines economic regions based on market
integration, mostly based on commuting
patterns (labor markets)
Applied Regional Studies
• Economic development:
– How and why does it occur in different places?
• Industrial location:
– Why do particular industries locate in particular
places?
• City location:
– Why are cities located in particular places?
Economics / Economic Systems
• Production
– What is produced
• Goods and services
– How it is produced
• Resource allocation
• Technology
• Labor
• Distribution
– Trade and markets
– Rules for distribution
• Market and non-market
– Who gets what and why
Concepts Used by Economists to Describe
and Explain Market-Based Economies
• Market incentives
– Income, employment, profits, accumulation
• Profit maximization
– Revenues and Costs
– Short run and long run
• Assets and liabilities
– Financial
– Physical
• Efficiency
– Producing the most with a given set of resources
• Equity
– Social / distributive justice
• Market Failures
– Not all transactions are subject to market pressures
– Government actions are required
Market Dynamics
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Economic fluctuations: season, cycle, trend, structure
Markets – emerge, evolve, integrate, disintegrate
Technology – production, distribution, products / services
Political forces – stability, control, chaos
Products – invention, innovation, obsolescence
Distribution channels – retail, wholesale
Finance
– Buyers ÅÆ sellers
– Debtors ÅÆ creditors
• Competition Îinnovation Îprofits
• Labor migration / regulation
Regional Export Industries:
Trade and Income Effects
REGIONAL EXPORT
(BASIC) INDUSTRIES
•Produce goods and
services to sell to the
outside world
•Employ residents of the
region
•Purchase inputs from
other firms in the region
•Generate income for the
region
Export
Goods / Services
Injection of
Income
CUSTOMERS
OUTSIDE THE
REGION
•Import goods and
services
•Send income to
the export regions
Purchasing Imports:
Trade and Income Effects
REGIONAL
BUSINESSES AND
CONSUMERS
•Purchase goods and
services from the outside
world
oHousehold demand
oBusiness demand
•Send income and
spending to the outside
world
Import
Goods / Services
Leakage of
Income
BUSINESSES
OUTSIDE THE
REGION
•Export goods and
services
•Receive income and
spending from the
regions to which they
export their products
Classification of Industries:
Export or Basic
• Industries located in the region that are generally
classified as export base or basic
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Agriculture
Mining
Manufacturing
Federal Government
• These bring income from outside the region.
Classification of Industries:
NonBasic or Residentiary
• Local Government (municipal services, public
education)
• Finance (finance, insurance, real estate)
• Trade (wholesale and retail)
– Exception – tourists
• Goods and services provided in the region for the
residents of the region.
• The larger the the nonbasic sector, the higher the
multiplier
Classification of Industries:
In Some Cases It Depends
• Transportation, communication, and public
utilities
– Depends upon the location of the users
• Import substitution
– An industry may emerge to serve the population where
previously imports have been the source of the
products.
Trade & Economic Development
• Small isolated coal mining community
– Exports all of its production of coal
– Must import the majority of products used by residents
– food, clothing, household good, cars, etc.
• Large integrated metropolitan area
– Produces some products for export
– Produces some products to supply the residents of the
region
Size and Economic Impacts
• Small less developed communities
– Economic Base (Export Share) is a greater proportion
of the economy
– Large spending leakages Î small multipliers
• Large integrated metropolitan area
– More residentiary production
– Smaller spending leakage Î larger multipliers
Zero Sum Game
• Assume that a market has just enough retail
capacity in grocery stores
• Another grocery store chain wants to enter the
market and seeks government subsidies to do so
• Problem
– This does not constitute growth in the economy
– Simply rearranges existing spending
Economic Growth & Development
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Economic Growth – quantitative change
Economic Development – qualitative or
structural change
Export led growth theory
A region increases in wealth and income with
1. Increases in exports
2. Increased import substitution
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Economic Development Policy
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Costs and Benefits of Economic Development
Linked Industries
• Forward Linked Industries: Supply Inputs
• Backward Linked Industries: Purchase outputs
and use these as inputs
• Economic Development of Industries Î
– Development of these linked industries
– A larger skilled labor pool
– Scale economies
Models Used by Regional Economists
• Demographic and Economic Projection Models
– Growth of the economy Î population growth
• Economic Base Models
– Identify basic industries
– Develop forecasts of growth
• Input-Output Models
– Analyze the inter-industry linkages
Location of Industries
• Complete or partial immobility of land and
other productive factors
– Comparative advantage Î specialization in
production & trade
• Economies of concentration (agglomeration)
• Costs of transport and communication
Technical Names
• Imperfect factor mobility
• Imperfect divisibility
• Imperfect mobility of goods and services
Advantage of Cities
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Central Place Theory
Proximity to resources and services
Agglomeration economies
Concentration of buyers and sellers
Increased competition among sellers
Large pool of buyers
Walter Christaller
• German geographer – 1933 work
• Economic importance and city size are directly
related
• Cities maintain “distance intervals” to not cut into
each others’ markets
Johann Heinrich von Thünen
• Economic model of cities
– The Isolated State (1826)
• Land prices increase
towards the center
• Transport costs increase
further from the center
• “Land-price gradient”
Graphic from: http://geography.about.com/
William Alonso
• Built on von Thünen’s ideas to explain land use patterns.
– Location and Land Use (1964)
• His model assumes that the city:
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Is flat and featureless
Has a single CBD
Has efficient transportation
Economic self interest motivates people
• Results:
– Only highest value activities are in CDB
– Residences and agriculture are in the periphery
Alfred Marshall
• British economist (1842-1924) who developed
microeconomic models
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Supply and demand characteristics
Market dynamics – short run, long run
Method of comparative statics
Cost theory
• Studied internal dynamics of industries and cities
Marshall’s Explanation of Cities
• Human capital and knowledge spillovers
– Workers find employment & firms labor
• Input markets
– Backward linked industries reduce costs
• Labor market pooling
– Pool of skilled labor share knowledge
– Great advantage to employers
Paul Krugman
• Economies of scale in manufacturing
• Locate industry to minimize transportation costs
– Balance access to inputs and customers
– Minimizes costs of production and distribution
• Beneficial to consumers - cost
Robert Lucas
• Human capital – education, training, experience
• Spillovers – productivity benefits transferred
among workers
• Productive exchanges increase with greater
access to colleagues
• Cities have greater concentration of human
capital Æ self reinforcing
Contested Theories
• Much debate / research concerning the relative
importance of these influences of urban growth
– Natural advantage, infrastructure, markets, labor,
education
• Other determinants:
– Politics
– Amenities / quality of life
New Economic Growth Theory
• Traditional regional economics has merged with
new economic growth theory
• Cities are centers of idea creation and
transmission
• Role as intellectual centers is increasing
• Key concepts:
– Role of technology
– Intellectual spillovers
– Human capital spillovers
Why Do Cities Exist?
• To reduce transportation costs for people, goods,
and ideas
• Goods
– Classic manufacturing cities of 19th century
– Advantage declines over time
• Transportation costs decline
• Manufacturing leaving cities
• People: Labor pooling Î innovation
– Cities are centers of innovation
– Innovation Î economic success
Modeling Spatial Patterns
• Optimization models
– Locate economic activities to maximize profits
– Locate households to maximize utility
• Bundled costs: housing and transportation
– Transportation models
• Gravity models
– Given a specific origin and a set of possible
destinations
– Probability of selecting a specific destination is greater
when the destination is closer and larger
Conclusion
• Traditional regional economic models provide a useful
framework to understand economic development.
• There are limitations to the use of traditional regional
economic models.
• Theories have been updated to incorporate the insights
from new economic growth theory.
• There are a set of models commonly used to evaluate
regional economies.
• Choice of model depends upon the purpose of the
analysis, the audience for the work, and the perspective
of the analyst.