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.
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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
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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
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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.
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REGIONAL GDP SCOPE
 Annual
GDP
 Current price (nominal) GDP
 By region and industry
 Using the production approach
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COMPONENTS OF GDP

Intermediate Consumption

Compensation of Employees

Operating Surplus and Consumption of
Fixed Capital

Net Indirect Taxes

Output
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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.
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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
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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
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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
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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
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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

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SIMPLE INPUT-OUTPUT FLOW TABLE FOR ONE AREA
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OUTLINE FRAMEWORK FOR A TWO REGION INPUT-OUTPUT TABLE
Basically
previous table
Basically
previous table
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OUTLINE FRAMEWORK FOR A MULTI-REGIONAL INPUT-OUTPUT TABLE
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TRADE THEORY
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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.

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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.
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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
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THEORIES OF TRADE PATTERNS
 Theories



country size
factor proportions
country similarity
 Theories


explore
explore trade competitiveness
Product life cycle
Porter Diamond theory
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THEORY OF TRADE PATTERNS
 Porter
Diamond theory
 Specialization
 Theory
 Factor
theory
of country Size
proportion theory
 Country
similarity theory
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WHAT THE MAJOR TRADE THEORIES DO AND DON’T DISCUSS
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INTERVENTIONIST THEORIES
 Theories
that support government intervention in the flow
of trade


Mercantilism
Neomercantilism
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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
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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
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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

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THEORY OF ABSOLUTE ADVANTAGE
Production Possibilities under Conditions of Absolute Advantage
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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
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THEORY OF COMPARATIVE ADVANTAGE
Production Possibilities under Conditions of Comparative Advantage
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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
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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
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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
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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
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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
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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
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LIFE CYCLE OF THE INTERNATIONAL PRODUCT
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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
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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
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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
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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
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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.
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48
SO THAT’S
REGIONAL ACCOUNTS AND TRADE THEORY
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What Next?
Lecture 6:
Regional Policy: The National Interest and Regional Objective
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