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Analysis of Economic
Base and Leading Sector

S at ya B u d i N u g ra h a , S .T. , M .T. , M . S c .

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Economic Base Theory

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Economic Base Theory title style

• The aim is to identify development sectors that

include both the base and non-base sectors in a
region.
• The main determinants of a region's economic
growth:
1) Demand for goods and services from outside
the region.
2) Increased exports from the region.

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Economic Activity
MasterConcept
title style

Economic
Activity

Base Non-Base

Stimulate
Regional
Economic
Growth
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Why the base economic activities could

stimulate regional economic growth?

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How does it relate to the non-base

sector?

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Impact of the Base Sector Existence
(Glasson, 1977)

• Increase revenue streams to the region.

• Increase the demand for goods and services
in the base sector.
• Leads to an increase in the volume of the
base sector.

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The Concept of Economic Base
(Richarson, 2001)

• Economic growth in a region is a multiplier

effect of the re-spending of income earned
through the provision of goods and
services produced by the region and
marketed outside the region.

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Assessment
Method of Base
and Non-Base
Sector

Direct Indirect
Mix Method
Method Method

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Leading Sector

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The Concept of Leading Sector

• In regional development, the base sector is

the cornerstone in determining the leading
sector.
• Leading Sector is a sector whose existence
is expected to increase the growth
(economic growth) of a region.

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Regional Economic Structure
(Ricardson, 1991)
• Leading Sector → economic sectors/
activities that serve the domestic and
outside markets.
• Non-Leading Sector → economic sectors/
activities that are only able to serve the
local market (inside the region).

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Leading Sector Criteria
(Tarigan, 2005)
• Has a high growth rate.
• Has a relatively large employment rate.
• Have high linkages between sectors (forward &
backward linkage).
• Able to create high-added value.

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The existence of a leading sector in a region depends

on the “gift” factor (endowment factors).

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Driving Factors for Leading Sector
Progress
• Development of transportation and
communication networks.
• Regional income and revenue
development.
• Technological development.
• Development of economic and social
infrastructure.

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Factors Causing Decline in Leading Sector

• Change/decrease in demand from outside

the region.
• Running out of resource reserves.

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Indirect Method of
Determination of Base/
Non-Base Activities and Leading Sector

• Sectoral Contribution Index (IKS)

• Location Quotient (LQ) Method
• Dynamic Location Quotient (DLQ)
• Growth Ratio Model (MRP)
• Shift Share (SS)

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Sectoral Contribution Index

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The Concept of IKS
• The simplest way to describe the
capabilities of the base sector.
• Analyzing the size of the contribution of
specific sectors to the regional economy in
aggregate.

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Formulation IKS
𝑃𝐷𝑅𝐵𝑠𝑖
• 𝐼𝐾𝑆 = 𝑃𝐷𝑅𝐵 𝑡𝑜𝑡

• Information:
• PDRB si = the value of PDRB sector i
• PDRB tot = total value of PDRB
Interpretation:
IKS value between 0 - 1
The value closer to 1, the
contribution or role of the
sector in the regional economy
is getting more significant and
more dominant so that it has
the potential to become a base
sector.
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Example
• PDRB Kota Semarang Atas Dasar Harga
Berlaku Menurut Lapangan Usaha (Juta
Rupiah), 2010 - 2020.

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Location Quotient (LQ) Analysis

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The concept of LQ
• The basis is the Economic Base Theory.
• Initial identification of the sector's capability in regional
development.
• To determine the base sector that can export (outside the
region).
• An indicator that shows the strength of the role of a sector in
a region compared to the role of the same sector in the
broader reference area.
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Formula LQ
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𝑋𝑖𝑗 𝑋𝑖𝑗ൗ
ൗ𝑅𝑉
• 𝐿𝑄 = 𝑋𝑖ൗ
𝑗
or 𝐿𝑄 = 𝑅𝑉𝑗ൗ
𝑋𝑖
𝑅𝑉 𝑅𝑉

• Information:
• LQij = Index/coefficient LQ sector i in Region j
• Xij = PDRB value of sector i in Region j
• Xi = PDRB value of sector i in the Province (reference area)
• RVj = Total value of PDRB in Region j
• RV = Total value of PDRB in Province (reference area)
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Interpretation
• The higher the LQ value of a sector, the
higher the comparative advantage of the
area concerned in developing the sector.

To identify the base sector/

leading sector
LQ
Analysis
To identify the level of specialization of a
particular sector or commodity 2525
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The Interpretation of LQ Value

Interpretation
LQ
Value Base Sector/ Leading/ Level of Market
Potential Specialization Service
LQ > 1 Base and Leading Specialized sector Export, serving
Sector domestic and
foreign markets
LQ < 1 Non-base and not Unspecialized sector Non-Export, not
leading sectors, no yet able to serve
potential domestic and
foreign markets
LQ = 1 Sector balanced with Specialization is Non-export, only
reference area similar to the able to serve the
reference region market within the
region
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Example
• PDRB Kabupaten Semarang terhadap
PDRB Provinsi Jawa Tengah

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Dynamic Location Quotient

(DLQ) Analysis

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The Concept of DLQ
• Variant DLQ (Suyatno, 2000), to overcome
the weakness of the LQ method which is
static (only describes the situation at a
particular time), as well as improve it to
find out changes or sectoral repositioning.

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 Formula DLQ Master title style
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(1+𝑔ij)
ൗ(1+𝑔𝑗)
• 𝐷𝐿𝑄𝑖𝑗 = (1+𝐺𝑖)
ൗ(1+𝐺)

• Information:
• DLQij = Index of Dynamic Location Quotient
• gij = Average growth rate of sector or sub-sector i in a Region
• gj = Average growth rate in the Region
• Gi = Average growth rate of sector or sub-sector i in Province (National) level
•G = Average growth rate in the Province (National) level
•t = analysis period 3030
Interpretation
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• DLQ > 1, it means that the proportion of the growth rate of sub-sector i to
the growth rate of GRDP of the Regency/City n is higher than the growth
rate of that sub-sector to the GRDP of the Province (National).
• Sector i is prospective and can still be expected to become the base
sector in the future.
• DLQ < 1, it means that the proportion of the growth rate of sub-sector i to
the growth rate of GRDP of the Regency/City n is lower than the growth
rate of that sub-sector to the GRDP of the Province (National).
• Sector i is not prospective so it is difficult to expect it to become the base
sector in the future.
• DLQ = 1, it means that the proportion of the growth rate of subsector i to
the growth rate of GRDP of the Regency/City n is proportional to the
growth rate of the subsector to the GRDP of the Province (National).
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Example
• Laju Pertumbuhan PDRB Kota Semarang
terhadap PDRB Provinsi Jawa Tengah.

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Combined Analysis of
LQ and DLQ

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Concept / Benefits
• Combined analysis of LQ and DLQ to
determine the occurrence of shifts and
repositions as well as assess the prospects
for the existence of the regional economic
sector in the future.

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Cross Table Typology Prospects for
Regional Economic Base Development

DLQ > 1 DLQ < 1

LQ > 1 Type I Type III
Base Sector, Base Sector,
Prospective Not Prospective
LQ < 1 Type II Type IV
Non-Base Sector, Non-Base Sector,
Prospective Not Prospective

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Contoh
• Tipologi Sektor Berdasarkan Nilai LQ dan
DLQ di Kota Semarang

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Multiplier Effect

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Concept and Definition
• To accelerate regional development,
leading sectors need to be prioritized in
order to have a broader impact on welfare
and provide a multiplier effect on other
sectors.

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Impact of Economic Base Development
• Export increase.
• Large multiplier impact → increase production and
investment, increase added value.
• Increased opportunities and job opportunities.
• Increase public income and taxes for the state.
• Increase economic growth.

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Formula #1
(can use income data or employment data)
• 𝑃𝐵 = 𝑃𝑇Τ𝑃𝑆𝐵
• Information:
• PB = Multiplier Effect
• PT = Total Revenue (PDRB)
• PSB = The Base Sector Revenue (PDRB
Sektor Basis)
• 𝑃𝐵 = ∆ 𝑃𝑇Τ∆ 𝑃𝑆𝐵
• Information:
• PB = Multiplier Effect
• ∆ PT = Total Revenue Change (PDRB) in two
different time tn and t0
• ∆ PSB = Base Sector Income Change (PDRB
Sektor Basis) in two different time tn and t040
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Formula #2
• 𝑃𝐵 = 𝑇𝐾𝑡𝑜𝑡Τ𝑇𝐾𝑏
• Information:
• PB = Multiplier Effect
• TKtot = Total Employment
• TKb = Employment in Base Sector
• 𝑃𝐵 = ∆ 𝑇𝐾𝑡𝑜𝑡Τ∆ 𝑇𝐾𝑏
• Information:
• PB = Multiplier Effect
• ∆ TKtot = Total Employment Change in two
different time tn and t0
• ∆ TKb = Base Sector Employment Change in
two different time tn and t0 4141
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Contoh
• Pengganda Basis Kabupaten Semarang

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Shift - Share Analysis (SS)

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Model SHIFT – SHARE
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Concept
▪ Shift - Share analyzes changes in economic activity (ex: production
and employment) over a certain period of time (> 1 year).

▪ The results of the analysis are to find out how the development of a
sector in a region is compared relatively to other sectors, is it growing
fast or slow?

▪ In this analysis it is assumed that changes in production /

employment opportunities are influenced by 3 components of
regional growth.
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MODEL SHIFT – SHARE
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Schematic

National Growth Component

(KPN)

REGIONAL GROWTH
(REGENCY/MUNICIPALITY)

Proportional Growth Regional Share

Components Growth Component
(KPP) (KPPW)

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 National Growth Component
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▪ KPN is a share component and is often referred to as the national
share.

▪ KPN is a change in production or employment opportunities in a region

caused by changes in production or employment opportunities in
general, national economic policies and other policies that are able to
affect the economic sector in a region.

▪ Examples of such policies are: exchange rate policy, controlling inflation

and unemployment problems as well as policies in taxation.

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 Proportional Growth Component
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(KPP)
▪ KPP is a component of proportional shift; namely deviation from the national
share in regional growth.

▪ KPP is a change in production or employment opportunities in a region caused

by the composition of the industrial sectors in the region, sector differences in
demand for final products, and differences in market structure and diversity.

▪ KPP is positive (KPP > 0) in regions/regions that specialize in fast-

growing sectors nationally.
▪ KPP is negative (KPP < 0) in regions/regions that specialize in sectors
that are nationally slow growing.
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 Regional
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(KPPW)
▪ KPPW is a component of a differential shift, often called a locational or
regional component or residual excess.

▪ KPPW is a change in the production or employment opportunities of a region

caused by the region's comparative advantage, institutional support, socio-
economic infrastructure and local policies in the region.

▪ KPPW has a positive value (KPPW > 0) in a sector that has a

comparative advantage / locational advantage in the region / area.
▪ KPPW is negative (KPPW < 0) in sectors that do not have a
comparative advantage / cannot compete.
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Formula :
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PE = KPN + KPP + KPPW

= (Yt/Yo – 1) + (Yit / Yio - Yt/Yo) + (yit / yio - Yt/Yo)

= [Ra – 1] + [ Ri - Ra ] + [ri - Ra]

Explanation:
▪ Yt = National economic indicators, year-end analysis.
▪ Yo = National economic indicators, early year analysis.
▪ Yit = National economic indicators of sector i, year-end analysis.
▪ Yio = National economic indicators of sector i, early year analysis.
▪ yit = Local economic indicators of sector i, year-end analysis.
▪ yio = Local economic indicators of sector i, early year analysis.
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Provision:
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PB = KPP + KPPW

▪ PB = Pergeseran Bersih/Clean Shift (Shift Netto) → to

determine/identify the development of a commodity.
▪ If PB ≥ 0, then the sector is progressive/advanced
growth and is a leading sector.
▪ If PB < 0, then the sector's growth is slow / not
progressive and non-leading.
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Example:
• Perhitungan Analisis Shift-Share

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Thank You

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