What is the economic base of this place?

• Author: Marcus, Morton J.

What is the economic base of your county? "Manufacturing," some will insist. Others, with equal vigor, will proclaim, "Farming." Fortunately, both can be right if they pick their numbers selectively.

The concept of economic base is very important in the theory and practice of economic development. We think of the economic base as the engine that drives the economy of the community. It is the sector or sectors providing exports from the local area to the rest of the world.

Without an economic base, that is, without an export sector, it is presumed that a community will die, unable to survive "by taking in each others' washing." Growth in the export sector is seen as the route to greater income and wealth for residents of the community.

Hence, we find most communities now devoting resources to attract "export industries," firms that will produce for people who live outside the community. This is no longer limited to "smokestack chasing," but has evolved into a sophisticated model where economic development professionals focus on activities such as tourism, health care, retirement, and education.

Location Quotients

How do we know what is the economic base of a community? For decades, economists and economic developers have used location quotients as a quick and dirty means of identifying dominant or prominent industries in an area. It is certainly a dirty means, filled with traps.

A location quotient (LQ) is very easy to compute. Take an industry (retail trade), find out what percent of employment (or earnings) that industry represents of total employment (or earnings) in Indiana (or the nation). Then do the same for retail trade in your county. Divide the county percent by the state (or national) percent and, behold, you have a location quotient.

For example, retail trade accounted for 6.95 percent of all earnings in Indiana. Down on the Ohio River across from Louisville, retail trade equaled 9.51 percent of all earnings generated in Clark County. This yields an LQ of 1.37. In the language of LQs, this indicates that Clark County is an exporter of retail services. If you know the area, it makes sense. People from Floyd, Scott, Jefferson, Washington, Harrison, and other counties do come to Clark to do some of their shopping.

The more an LQ is above one, the greater the strength we have in our belief that this sector is an exporter for the local area. The closer the LQ drops toward zero, the more likely people in that county are importing goods...