Web Book of Regional Science Regional Research Institute 2020 Regional Impact Models William A. Schaffer Follow this and additional works at: https://researchrepository.wvu.edu/rri-web-book The Web Book of Regional Science Sponsored by Regional Impact Models Second Edition By William A. Schaffer Emeritus Professor of Economics Georgia Institute of Technology Published: 1999 Updated: March 2020 Series Editors: Scott Loveridge Randall Jackson Professor, Extension Specialist Director, Regional Research Institute Michigan State University West Virginia University <This page blank> The Web Book of Regional Science is offered as a service to the regional research community in an effort to make a wide range of reference and instructional materials freely available online. Roughly three dozen books and monographs have been published as Web Books of Regional Science. These texts covering diverse subjects such as regional networks, land use, migration, and regional specialization, include descriptions of many of the basic concepts, analytical tools, and policy issues important to regional science. The Web Book was launched in 1999 by Scott Loveridge, who was then the director of the Regional Research Institute at West Virginia University. The director of the Institute, currently Randall Jackson, serves as the Series editor. When citing this book, please include the following: Schaffer, William A. Regional Impact Models. Web Book of Regional Science. Regional Research Institute, West Virginia University. Edited by Scott Loveridge, 1999: Randall Jackson, 2020. <This page blank> PREFACE This survey of regional input-output models and their use in impact analysis has evolved from over twenty years of experience in constructing regional economic models and in teaching about them. My objectives are to present this family of models in an easily understood format, to show that the models we use in economics are well-structured, and to provide a basis for understanding applications of these models in impact analysis. I have tried to present the models in such a way that understanding the logic and algebra of the simplest economic-base model leads to an understanding of the only slightly more complex regional and interregional input-output models in common use today. The advanced models become matrix-algebra extensions of the simple models. I have greatly benefited from the guidance of Professor Kong Chu over the years. He first introduced these models to me in 1967 and has helped with interpretations and tedious explanations of mathematical points until only recently; now he teaches me about life and philosophy. I am in debt to a number of Georgia Tech students as well. While they have been assistants and students in title, they have been my best teachers as well. To name a few: Richard Dolce was my first programmer; Malcolm Sutter spent three years with me programming models in Hawaii and for Georgia; Clay Hamby maintained Sutter’s programs and helped with several impact studies; Larry Davidson, now Professor of Economics at Indiana, has remained a colleague for over 25 years; Ross Herbert spent two summers in Nova Scotia thrashing out a completely new system; Steve Stokes had the pleasure of reconstructing both the Hawaii and Nova Scotia models; and John McLeod continues to improve my computing skills and graphics and managed data collection and organization in a recent study of amateur sports in Indianapolis with Davidson. In addition, John converted this document to its HTML format. Thanks to all of these, to a set of astute but anonymous reviewers, and to Scott Loveridge, the Regional Research Institute, and West Virginia University for making this experiment in electronic publication possible. I would appreciate your reporting of all errors of communication and expression in this document. William A. Schaffer June 1999 i <This page blank> Contents 1 PLACE AND SPACE 1 The place of space in economics......................................1 Neglect of space in economic thought...................................1 The Anglo-Saxon tradition: an emphasis on time .........................1 The quest for a "wonderland of no spatial dimension" ......................2 Noneconomic factors of location ...................................2 The marginal analysis ........................................3 The importance of national issues ..................................3 Data deficiencies ...........................................3 The importance of space in economic life.................................3 What is regional economics?........................................4 2 WHAT IS A REGION? 6 Homogeneous regions............................................6 Nodal regions................................................6 Metropolitan Statistical Areas before 2003 .............................6 Core-Based Statistical Areas after 2003 ..............................7 An economic-base approach........................................7 Other classifications............................................8 Physical regions ............................................8 Political regions ............................................8 Territories ...............................................8 Regions of convenience ........................................8 Data regions .............................................9 Appendix 1: Metropolitan Area Concepts before 2000 (from U.S. Statistical Abstract, 1994)....9 Appendix 2: Defining Metropolitan and Micropolitan Statistical Areas................ 11 3 REGIONAL MODELS OF INCOME DETERMINATION: SIMPLE ECONOMIC-BASE THEORY 13 Economic-base concepts.......................................... 13 Antecedents .............................................. 13 Modern origins ............................................ 14 The structure of macroeconomic models................................. 14 The "strawman" export-base model.................................... 16 The typical economic-base model..................................... 17 Techniques for calculating multiplier values............................... 18 Comparison of planner’s relationship and the economist’s model ................. 18 The survey method .......................................... 19 The ad hoc assumption approach .................................. 19 Location quotients .......................................... 19 Minimum requirements ........................................ 21 "Differential" multipliers: a multiple-regression analysis ..................... 21 Critique: advantages, disadvantages, praise, criticism.......................... 22 Appendix A: Review of Economic-Base Literature........................... 23 Appendix B: An Economic-Base Model of Atlanta........................... 39 Note A: Techniques for Data Analysis.................................. 43 Introduction .............................................. 43 Location quotients .......................................... 43 Shift-share analysis .......................................... 43 Thoughts on writing an area profile ................................. 45 Elements to include in a location quotient analysis ........................ 46 4 INPUT-OUTPUT TABLES AND REGIONAL INCOME ACCOUNTS 48 i Introduction................................................. 48 The regional transactionstable...................................... 48 Income and product accounts....................................... 50 Summary.................................................. 52 Appendix 1: DVD data sources: the Regional Economic Information System............ 52 Appendix 2: Measures of regional welfare: Personal Income...................... 53 The problem with GSP estimates .................................. 53 The widespread use of personal income estimates ......................... 53 5 THE LOGIC OF INPUT-OUTPUT MODELS 54 Introduction................................................. 54 The rationale for a model: analysis vs. description........................... 54 Preparing the transactions table: closing with respect to households................. 54 The economic model............................................ 55 Identities: the transactions table .................................. 55 Technical conditions: the direct-requirements table ........................ 56 Equilibrium condition: supply equals demand ........................... 57 Solution to the system: the total- requirements table ....................... 57 Economic change in input-output models................................ 60 Causes vs. consequences of change ................................. 60 Structural change ........................................... 60 Changes in final demand ....................................... 61 6 REGIONAL INPUT-OUTPUT MULTIPLIERS 63 Introduction................................................. 63 The multiplier concept........................................... 63 An intuitive explanation ....................................... 63 The iterative approach ........................................ 64 Multiplier transformations......................................... 66 Output multipliers .......................................... 67 Employment multipliers ....................................... 68 Income multipliers .......................................... 68 Government-income multipliers ................................... 69 Appendix 1 Multiplier concepts, names, and interpretations...................... 69 Introduction .............................................. 69 Income multipliers .........................................