Measures such as Gross Regional Product (GRP), gross-base contribution analysis, and location quotient provide information to compare economic performance. They can be used to highlight areas of regional strength and competitive advantage.
Gross Regional Product
Gross Regional Product (GRP) measures the final market value of all goods and services produced in the region. It is essentially GDP for any region smaller than the United States. It is one of the most commonly cited metrics to assess the size of the economy and rate of growth.
Gross-Base Contribution Analysis
Gross-Base contribution analysis is a method to evaluate how exports in one sector of an economy bring about additional economic activity in other sectors. This analysis helps to describe the local economy and to identify economic drivers for the region. There are two ways of assessing economic contribution, gross and base.
Gross contribution quantifies economic activity generated by that sector. It is the value typically compiled by government agencies and published as economic statistics. Economic activity is generated by serving other industries in the region and circulating economic activity within the region.
Base contribution quantifies economic activity by giving credit to the industry that brings new dollars into the region through its exports. It includes all exports for the sector (direct) plus all the inputs from other sectors that support those exports (indirect) and economic activity created when employees use wages derived from the sale of exports to purchase local goods and services (induced). This measure helps to identify linkages among all sectors of the economy needed to produce export sales. Dependency is defined as the percent of economic activity, measured in output or employment, that is generated by the economic base (exports) of a given sector.
The location quotient (LQ) helps identify exporting and importing industries based on national averages. An exporting industry is one where the industry not only meets the local demand for its products, but also produces enough so it can sell outside of the region. An importing industry is one where local production levels are insufficient to meet local demand. When interpreting the data, a location quotient greater than 1.0 indicates that the economy is self-sufficient, and may even be exporting the good or service of that particular industry. (As a rule of thumb, a location quotient greater than 1.25 almost certainly identifies exporting industries.) The presence of an exporting industry often indicates a local competitive advantage On the other hand, a location quotient less than 1.0 suggests that the region tends to import the good or service. (The applicable rule of thumb is that a location quotient less than 0.75 indicates an importing industry.) The image below can assist with evaluating the location quotient bubble chart.
National growth is how much of the regional industry’s growth is explained by the overall growth of the national economy. If the nation’s whole economy is growing, you would generally expect to see some positive change in each industry in your local region.
Industrial mix effect represents the share of regional industry growth explained by the growth of the specific industry at the national level. This number is calculated by subtracting the national growth rate for a specific industry from the national growth rate for the total economy. This growth rate is applied to the regional jobs in that industry.
Regional shift explains how much of the change in a given industry is due to some unique competitive advantage that the region possesses, because the growth cannot be explained by national trends in that industry or the economy as whole. This effect is calculated by taking the total regional growth of the given industry and subtracting the national growth for that same industry. This effect can be positive even as regional employment in the industry is declining, which would indicate that regional decline is less than the national decline.
Questions to ask of the data…
What is the major exporting industry in your community?
Compared to other regions, does the community seem highly dependent on any particular industry? How might this dependence be problematic? Or, is this dependence a strength?
Are there any obvious relationships between industries with high location quotients and other sectors of the local economy? For example, an exporting industry might be highly dependent on other local businesses for important inputs.
Does this information support popular perceptions? Or, does the analysis uncover surprising areas of economic strength?
Does the analysis reveal any potential opportunities to substitute local production for imports?