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The Economic Base Of A City

You need to know the market and the economic conditions to be a good, thorough appraiser. To a certain degree you have to be an economist to really know what you're doing. The Economic Base of a community is the economic activity in that community which enables it to attract income from other areas outside its borders. It's not just referring to the job someone holds, but the type of industry their job comprises. For example, employment in areas of Texas is predominantly in the oil industry. Just like employment in Silicon Valley, California is predominantly in the computer related industries.

From an appraisal standpoint you're interested in the Location Quotient. The Location Quotient refers to the percentage of employment in a particular industry of an area as it compares to the national percentage in that industry for all areas. If the location quotient is greater than one, using the following math equations, then that industry is considered the base industry or the area. This means that in our examples above, Texas has a much higher Location Quotient percentage of employment in the oil industry, as compared to the national average of the oil industry employment for all areas of the country. Silicon Valley has a much higher Location Quotient percentage of employment in the computer industry, as compared to the national average of employment in the computer industry.

Remember that if the Location Quotient > 1 (greater than one) then it is a basic industry or service for that city. If the economic activity is being exported, then it's the Economic Base of a city.

Now let's see how all of this relates to an actual appraisal example. Let's say there was going to be an increase in the local population due to new jobs that opened in a particular industry. You have been hired by the company offering the new jobs to find out what amount of housing is needed for the new employees. Through you're research and knowledge of the local market; you have the following data to work with:

  • LQ = Location Quotient

  • LEi = Local Employment in an Industry

  • LEt = Local Employment Total in all industries

  • NEi = National Employment in an Industry

  • NEt = National Employment Total in all industries

  • LQ = (LEi/LEt)/(NEi/NEt)

  • Et = Total Employment

  • Eb = Base Employment

  • Es = Service Employment

  • Et = Eb - Es

  • Ke = Employment Multiplier

  • Ke = Et/Eb

  • Pt = Total Population

  • Kp = Population Multiplier

  • Kp = Pt/Et

 

  1. The total population, Pt, for the area is currently 60,000 people.

  2. The increase in the population of the area created by the new job openings will be 857 people.

  3. The current density of the population has been averaged out to determine there are 2.5 people for each apartment unit and 3.5 people for each single family house in the area.

  4. The housing accommodations for the current population is averaged out to estimate that 40% of the people in the area live in apartments and 60% of the people live in single family houses.

To start we'll determine how many of the 857 people hired will live in apartments and how many will live in single family houses. To find this, simply use the percentages that currently exist in the area. We know that currently 40% of the people live in apartments and 60% of the people live in single family houses.

857 x 40% = 343 will live in apartments

857 x 60% = 514 will live in single family houses

Next, using these figures, we need to figure out how many apartments and how many single family houses are needed for the new employees. This is found by using the numbers that currently exist in the area. We know that currently there are 2.5 people for each apartment unit and 3.5 people for each single family house in the area. Simply divide the new employees for each type of dwelling unit by these amounts.

343/2.5 = 137 apartments will be needed

514/3.5 = 147 single family houses will be needed

137 + 147 = 284 total housing units will be needed

Add the total apartments needed to the total single family houses needed. The result is, that 284 units would be the increase in the total housing needed for the increased employment and population growth in the area, due to the new job openings.

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