Economic development

Learning objectives

• Explain economic base theory and calculate and apply an economic base multiplier.
• Use location quotients to identify basic industries, and recognize their assumptions.
• Describe cluster-based strategies and the main economic development approaches: retention, attraction, entrepreneurship, and workforce development.
• Calculate and interpret retail capture and leakage.
• Distinguish direct, indirect, and induced effects in an economic impact analysis.
• Evaluate incentives and place-based programs, including TIF, Opportunity Zones, and business improvement districts.

Key concepts

Economic base theory

Economic base theory divides a local economy into two sectors:

• Basic (export) activity sells goods and services to customers outside the local economy: a factory shipping products nationally, a university enrolling students from elsewhere, a regional hospital, tourism. It brings new money in.
• Nonbasic (local-serving) activity sells to local residents and businesses: grocery stores, barbers, local restaurants, dentists. It recirculates money already in the economy.

The theory holds that regional growth is driven principally by basic industries: when they grow, the new income they bring in supports more nonbasic jobs.

8 more sections follow in the full lesson.

Key terms

• Economic base theory: The theory that basic (export) industries drive regional growth.
• Basic (export) sector: Activity selling to customers outside the local economy.
• Nonbasic (local-serving) sector: Activity selling to local customers.
• Economic base multiplier: Total employment divided by basic employment.
• Location quotient: The ratio of an industry's local employment share to its national share.
• Cluster: A concentration of interconnected firms, suppliers, and institutions in a related field.
• Business retention and expansion (BRE): Programs that help existing businesses stay and grow.
• Trade area: The area from which a business or center draws most customers.
• Leakage: Resident spending that goes to stores outside the trade area.
• Capture rate: The share of trade-area spending captured by local businesses.
• Clawback: A provision requiring repayment of incentives if performance targets aren't met.
• Opportunity Zone: A designated low-income tract where qualified investments receive capital gains tax benefits.
• Economic gardening: Growing an area's economy by helping existing local firms expand.
• Direct effects: The jobs and spending of a project itself.
• Indirect effects: Added activity at local suppliers to a project.
• Induced effects: Added activity from workers spending their wages locally.
• Substitution effect: Local spending that shifts from one local business to another rather than adding new spending.