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# economic base theory

A theory that explains urban and regional growth in terms of a division of employment into basic and non-basic sectors. The basic sector (B) comprises those industries that meet external or export demand, and the location and growth of this sector is viewed as a function of national and international forces. The non-basic sector (S) is locally oriented employment, servicing the total local population (P). The total population is a function of total employment (E) and the economic base relationships are:

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The coefficients Î± and Î² can be obtained by regression using observations for a sample of cities or for one city or region over time. Growth (or decline) in local population and employment is controlled by changes in the basic sector, and the impacts (multipliers) of such changes can be calculated from the economic base equations:

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A unit increase in B generates Î±/(1 â€” Î±Î²) units of additional local population.

Economic base theory is very simplistic in its assumptions, but because its data demands are simple it has been widely employed in regional economic analysis. It is used, for example, in activity allocation models and Lowry models (cf. location-allocation models). Correct identification of the basic sector is crucial, and location quotients are frequently used for this purpose. Either industries with high indices of specialization are defined as basic industries, or the quotient is used to define a proportion of employment in an industry as basic; so that, for example, one-third of employment in an industry with a quotient of 1.5 is designated as basic employment. A more sophisticated approach is to use input-output analysis to trace actual inter-industrial linkages, but this is very data-demanding and expensive.

The major limitations of economic base theory spring from its aggregative nature: the difficulties of sector definition; the dubious assumption that the aggregate multipliers will remain constant; and an inability to trace the impact of particular basic sector shifts, such as a rise in oil exports, on specific sectors of the local economy.Â (LWH)

Suggested Reading Glickman, N.J. 1997: Econometric analysis of regional systems: explorations in model building and policy analysis. New York and London: Academic Press, 15-27.

##### economic geography

Other Terms : territorial justice | isolines | blockbusting
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