TOOLS FOR ECONOMIC ANALYSIS

1. Using Reilly’s Law – using the following information to determine what the distance is

from the smaller community is.

 Guelph has a population of 135,474

 Mississauga has a population of 828,854

 The distance between them is 71 Kilometers.

 What does this number mean?

Answer: - The Reilly’s law aims to find a point of indifference between two locations, so the

trading area of each can be determined. This point is assumed to be a function of the distance

between two locations pondered by their respective size (population often used for this purpose).

A location can thus be more attractive than the other.

50.6
20.4

Mississauga Guelph
71 Kilometers

MMG = Dab / [1 + ((PB / PG)^1/2)]

= 75

1+ 135,474 / 828,854

MMG = 50.6 Kilometers.

Therefore, the distance from the smaller community is 71 – 50.6 = 20.4 Kilometers.
In the above figure, two locations are 71 km apart. According to the Hotelling principle, the

point of indifference should be halfway in between (35.5 km). However, since Mississauga has a
larger population (more weight), it is assumed to draw more customers. Under such

circumstances, the point of indifference is 50.6 km away from Guelph.

2. Is location theory useful? Yes. Location theory explains the basic, universal factors that

determine and influence the location of all kinds of economic activity. There are

economic geographic laws which determine the life of the economy, so are there special

economic-geographic laws determining the arrangement of towns. Location matters for

entrepreneurship, knowledge exchange, and innovation. Location choices and its factors,

tools include:

 Land and its attributes for instance the business size (retail or wholesale), the

drainage, building height.

 The labor and management for instance the type of labour (skilled vs

unskilled), recruitment potential.

 The capital for instance finance and equipment, venture capital, machinery.

 Materials and power for instance inputs and electricity supply.

 Organization, behaviours, and change: decision-making of the firm.

 Market and price for instance cost of living, consumer demands, sales.

 Transportation and freight rates: for instance, inputs and outputs,

infrastructure.

 Agglomeration, linkage and external economies for instance learning. It

stands for all types of businesses (contemporary, knowledge/creative)

 Public policy, planning, and the state for instance the taxes to be paid to the

state, the regulations and the plans.

All the above are some of the tools needed to prove the location theory and influence where a

given business should be located. The business type influences the relative importance of these

factors.

3. Yes, it can be used for larger scales like regions and nations. Okun created the leaky

bucket analogy in Equality and Efficiency, the Big Tradeoff, which is becoming

renowned amongst economic experts: "The wealth has to be transported from the affluent

to the poor in a leaky bucket. Wealth pours into an area to spread throughout local

companies like water into a container in the leaky bucket analogy for regional industries.

Water leaking out symbolizes money leaving the economic growth to pay for imports.

The greater the water-tightness of the bucket, the greater the riches kept.

Since the government controls the economy of a region and the whole national large, transfer

of wealth through taxes from the comparatively wealthy to the relatively poor is a legitimate

government strategy. However, there is a loss of effectiveness in the distribution chain. Such

costs are ascribed to administration expenses associated with taxing and distributing, as well

as incentive effects. Since their welfare benefits are lowered when they earn more money, the

poor have less motivation to labor. Since higher marginal rates absorb a big portion of the

additional revenue, the wealthy have much less motivation to labor. The highly wealthy also

have a stronger motivation to invest on tax-deductible products and tax shelters in order to

avoid paying taxes: Taxation at a high level.