Techniques of Regional Analysis

Regional Growth Theories & Methods

Overview of Techniques of Regional Analysis
• Objective: To present an overview of the important theories, methods and
techniques of regional planning, and illustrate their applications
• The task is rendered difficult due to acute shortage of reliable data at the district and
block levels
• In economic theory, growth means increase of income – total income and/or per
capital income
• Regional growth implies a better use of the ‘factors of production,’ such as land,
labour, capital, etc. of the region
• Moreover, a region can also grow due to an increase in the level of demand for its
commodities from other regions
• Regional growth may be caused by either endogenous or exogenous factors or both
(having an external/internal cause or origin)
Regional Growth Models
• Endogenous growth models:
• Sector theory, Stages theory
• Harrod-Domar model, Neo-classical model of growth
• Regional input-output analysis
• Exogenous growth models:
• Export Base Model
• Spatially induced growth models:
• Theories of industrial location and spatial development – theories of
Weber, Christaller and Losch
• Rank-size rule
• Perroux’s growth pole theory; contributions of Hirschman and Myrdal
Demand-supply curves
• In microeconomics, supply and demand is a
theoretical model of price determination in a
market
• Holding all else equal, in a competitive market, the
unit price for a particular good will vary until it
settles at a point where the quantity demanded will
equal the quantity supplied (at the current price)
• This results in an 'market equilibrium’ for price and
quantity transacted
• Adam Smith – “Wealth of Nations,” 1776

• A positive shift in demand will result in an increase

in price (P) and quantity of the product sold (Q)
• A positive shift in supply will result in an decrease
in price (P) but increase in quantity of the product
sold (Q)
Concept of Regional Multipliers
• Main idea: Growth in one sector induces growth in another sector
• To explain this, we use the ‘multiplier concept’
• e.g. If an initial employment of 1 more labourer ultimately results in an employment of 4
labourers, we say that in the economy the multiplier action is 4
• Or, if we spend/invest 1 more rupee and find that it leads ultimately to transactions worth 3
rupees, then the multiplier action of investment on transactions is 3
• So, in economics, the multiplier shows the effect of a change in a causal factor on
another factor (usually national income or employment)
• Keynesian economics is a macroeconomic theory of total spending in the economy
and its effects on output, employment, and inflation
• Based on this theory, Keynes advocated for increased government expenditures and
lower taxes to stimulate demand and pull the global economy out of the depression
Investment & Employment Multipliers
• Investment Multiplier, introduced by John Maynard Keynes (b. 1883), is the
coefficient relating to an increment of investment to the resulting increment of
income
∆
• If initial investment is I, and initial total income is Y, the investment multiplier
∆

• Employment Multiplier, introduced by Richard Kahn (b. 1905), is the coefficient

relating to an increment of primary employment (e.g. on public works) to the
resulting increment of total employment (primary + secondary)
• If initial primary employment is EP and resulting total employment is ET , then the
employment multiplier 𝑘′ = ∆∆EET
P
Economic Base Multiplier
• At the regional level, there are 2 types of activity – ‘basic’ and ‘non-basic’
• Basic activities are those which produce goods (or services) for export
• Non-basic activities produce goods (or services) for local use
• Fluctuations in basic activities lead to fluctuations in local income, which in turn
induce fluctuations in various other activities and trades – a multiplier effect
• So, an increase in basic activity in a region increases flow of income into that region,
thus resulting in increase of demand for non-basic activities
• A decrease in basic activity leads to a depression in demand for non-basic activities
• This is the idea of the economic base multiplier, calculated in terms of employment
&
•
∆(TE)
• 𝐸𝑐𝑜𝑛𝑜𝑚𝑖𝑐 𝑏𝑎𝑠𝑒 𝑚𝑢𝑙𝑡𝑖𝑝𝑙𝑖𝑒𝑟: 𝑘′ =
∆(EB)
Economic Base Multiplier
∆
•
∆ B

• e.g.: If in a region, employment in basic activities in increased by 10,000 and this

results in an increase in employment in non-basic activities by 20,000, we get …
∆ , ,
• =
∆ B ,

• Note: The economic base multiplier does not take account of the effect of imports
Inter-regional Trade Multiplier
• To factor in imports alongside exports, it becomes necessary to consider an ‘inter-
regional framework’
• This modified multiplier is termed inter-regional trade multiplier
• Propounded by Walter Isard, b. 1919, called the Father of Regional Science
• In an open system (both exports and imports), a region’s income is expressed as:
•
• where, Y = region’s income, I = region’s investment expenditure, C = region’s consumption expenditure,
E = exports from the region, M = imports into the region
• To express a change (increment) ….
∆
• Taking a cue from Keynes’ investment multiplier
∆
… we can derive:
∆
• Inter-regional Trade Multiplier as … to denote change in regional income
∆ ∆
Endogenous Growth Models: Sector Theory
• Simplest theory that emphasizes the internal factors of growth
• Primary sector: Extraction & production of raw materials (agriculture, fishing, mining, etc.)
• Secondary sector: Transformation of raw materials into manufactured goods
• Tertiary sector: Provision of services to consumers and businesses
• It lays emphasis on the structural changes taking place in an economy, i.e. a shift in
employment from primary  secondary  tertiary sector
• Originates from the Clark-Fischer hypothesis:
• A rise in per capita incomes in the regions would be accompanied by a decline in the
proportion of resources employed in agriculture (primary sector), and an increase in
proportion of resources employed in manufacturing (secondary sector) and later in
service (tertiary sector) activities
• As a result of this reallocation, division of labour and specialization will follow
providing the main dynamic impetus for regional growth
Endogenous Growth Models: Stages Theory
• An extension of the sector theory is the stages theory
• The growth of a region is basically an evolutionary process involving different stages
• 1st stage: Self-sufficient subsistence (primary) economy depending wholly on
agriculture (localization of natural resources) with little investment or trade
• 2nd stage: Improvements in transport induce a sort of regional specialization &
development of trade. So, village industries based on simple production techniques
are developed
• 3rd stage: Increasing inter-regional trade introduces a diversification of regional
production activities (dairying, fruit-growing, etc.)
• 4th stage: Increasing population pressure on land and diminishing agricultural returns
force the region to industrialize. Initially agricultural processing industries develop
and over time secondary (more technically advanced) industries are set up
• 5th stage: Tertiary industry producing for exports is developed. Now a region can
export capital, skills, technical knowledge & specialized services to less developed
regions.
Endogenous Growth: Harrod-Domar Model
• Harrod-Domar model (1939) is used in development economics to explain an economy's
growth rate in terms of the level of saving and of capital
• It has two basic assumptions:
• (1) the saving of a community in period t is a constant proportion (s) of the income received
during that period
• 𝑡
• (2) the desired investment during period t is a constant proportion (g) of the amount by which
the income during that period exceeds that of its previous period (t-1)
• 𝑡 𝑡 𝑡 − 1)
• National income ( 𝑡) in period t is the summation of consumption & investment in that period
• 𝑡 𝑡+ 𝑡
• In Keynesian system, actual savings equals actual (or realized) investment – since actual saving
is income minus consumption, while actual (or realized) investment is what is left over from
income after consumption has taken place
Endogenous Growth: Harrod-Domar Model
• …. This is the equilibrium rate of growth of income,
• Harrod calls it “warranted rate of growth of income”.
• Since both s and g are constants, the income must continue to increase as a constant
rate, i.e. income must increase by a greater and greater amount if the system is to
remain in equilibrium
• In addition to ‘warranted rate’, Harrod also postulates a “natural rate of growth of
income” – the maximum possible rate of growth given natural resources and a
growing supply of labour and organization
• But, it is not necessary that the actual rate of growth should coincide with the
‘warranted’ or ‘natural’ rate or either of them
Endogenous Growth: Harrod-Domar Model
• Since the actual rate of growth often does not coincide with
the ‘warranted’ or ‘natural’ rate or either of them,
can be modified to …
• 𝑡 𝑡−1 = 𝑡

• where c is a positive constant and indicates the amount that

has been over-invested or under-invested in the economy
• If there is over-investment, there is over-production, which
will force investors to cut down their investment.
• This will lead to a fall in income and the constant c will
increase leading to further divergence between actual and
warranted rates of growth
• Similarly for under-investment, there will be further
divergence between actual and warranted rates of growth.
Endogenous Growth: Neo-classical Model
• The Neoclassical Growth model outlines how a steady economic growth rate results
when three economic forces come into play: labour, capital, and technology
• The theory argues that technological change significantly influences the overall
functioning of an economy
• Formulated by Solow & Swan in 1956
• It promises accurate adjustments in response to the Harrod-Domar problem of
divergence between ‘warranted’ and ‘natural’ growths
• A general production function of a region i is given by
• 𝑖 𝑖 , 𝑖 ) … where 𝑖 , 𝑖 , 𝑖 are the income, capital and labour of a region i
• If this equation is a linear homogeneous equation, then it assures the convergence in
regional per capita incomes, but requires highly restrictive assumptions
Endogenous Growth: Neo-classical Model
• 𝑖 , 𝑖 ) is a production function that will become a linear homogeneous equation,
only with the following assumptions:
• Full employment, perfect competition, one homogeneous commodity, zero transportation
costs, fixed supply of labour, no technical progress and identical production functions in all
regions
• Under these restrictive and highly theoretical assumptions, the marginal product of labour
will equal the wage, while the marginal product of capital will equal the return on capital
• Wage will be a direct function of capital-labour ratio, and return on capital will be an inverse
function of capital-labour ratio
• Thus the summary inference is: For each region producing a homogeneous commodity with
identical production functions, the region with the higher capital-labour ratio will have a
higher real wage and a lower marginal product of capital, and vice-versa
• So for equilibrium, labour will flow from low-wage to high-wage regions and capital will flow
from high-wage region to low-wage region.
Input-output Analysis
• It is a macroeconomic analysis based on the interdependencies between different
economic sectors or industries
• This method is commonly used for estimating the impacts of positive or negative
economic shocks and analyzing the ripple effects throughout an economy.
• Input-output analysis was evolved by Leontief (1951)
• Leontief assumes that the economy consists of a number of interacting industries,
where each industry produces a single good with a single process of production
• To produce that good, that industry needs input goods made by itself and other
industries, as well as labour
• Each industry must produce enough to supply the needs to other industries and meet
the external (exogenous or net) demand
• ‘Inter-dependence’ indicates that each industry employs the output of other
industries as inputs, while its own outputs are used by other industries as outputs
• https://www.youtube.com/watch?v=U0hGtZqUbSM
Input-output Analysis: An illustration
• Let us consider an over-simplified economy with only two industries – agriculture &
manufacturing – with INPUT-OUTPUT data provided as below (in million tons):
Industries Inputs to Inputs to Final demand Total Output
Agriculture Manufacturing (consumption)
Agriculture 25 175 50 250
Manufacturing 40 20 60 120
Labour 10 40 -- 50

• The production function can be summarized as Total Output = f(Agri, Manuf, Labour)
• 250 unit of agriculture output is produced by using 25 units or agricultural goods, 40
units of manufacturing goods and 10 units of labour …. i.e. 250 = f(25, 40, 10)
• Similarly, manufacturing production function is 120 = f(175, 20, 40)
• This data table can be extended to as many industries (or production sectors) as
necessary to estimate the economic impacts on various sectors in an economy
Input-output Analysis: An illustration
• Total input-output (I-O) table for two industries:
Industry Inputs to Inputs to Final demand Total Output
Industry A Industry B (consumption)
Industry A x11 x12 Y1 X1
Industry B x21 x22 Y2 X2
Labour x01 x02 -- X0
• From the earlier formulation of production function, we get
• X1 = 𝑥 +𝑥 +𝑌
• X2 = 𝑥 +𝑥 +𝑌
• X0 = 𝑥 +𝑥
• This system of equations can be written as ,
• So, the total output of a given production sector is the sum of the flows to other production
sectors plus the flow to final demand
• The technical coefficients of the various sectors can be calibrated using actual I-O data
Theories of Industrial Location
• These theories attempt to explain why the industries are located where they are ,
why the locations are shifted and what can be the best location for a particular
industry, keeping in mind the regional resources available
• Regional resources refer to natural endowments available in the region, transport
networks, existing demand, potential demand, etc.
• These theories are of special interest to economists, geographers and planners since
location of industries (& markets) decide eventual patterns of spatial development
• Location theories have various approaches, notable among them being:
• Von Thunen (1826) emphasizing on cost factors in regard to agricultural location
• Alfred Weber – Theory of the Location of Industries (1909) based on least-cost
approach & the idea of Agglomeration (concentration of industries at one location)
• August Lösch – based on Demand considerations in the Economics of Location (1954)
– where he propounded the Demand Cone
Theories of Industrial Location
• Lösch’s Demand Cone:
• He assumes an isometric plane, that is a
homogeneous land surface with evenly distributed
population of self-sufficient farm households each
having the same tastes & similar technical
capabilities
• At the production point, OP is the price of the good,
where quantity PQ is sold
• As distance increases, due to transport costs, price
increases to OR, so quantity sold reduces to RS
• When price reaches OF, quantity sold becomes zero
• When this curve is rotated, it gives the demand cone
• This circle grows in size and other markets emerge
too, till the circles touch or even overlap – unserved
or overserved areas
• Finally, hexagonal market shapes become the most
efficient one to explain demand zones
 Location theories: Central Place Theory
• Proposed by Walter Christaller (1933) based on his study of
settlement patterns in Southern Germany
• Central Place Theory of Christaller (CPT) is one of the most
appreciated theories of urban geography – of great importance
in gravity model theories of urban planning
• He was analyzing the relationships between settlements of
different sizes and trying to relating their economic activities
(markets) with the population
• It tries to explain the spatial arrangements and distribution of
human settlements and their number based on population and
distance from another settlement
• It explains why the highest order settlement has very unique
activities which can only be supported by them (due to large
population and size)
• It indicates the nature of activities in different order of
settlements
• https://www.youtube.com/watch?v=Apcd0b046Y0
Central Place Theory
• Two main concepts of the CPT:
• THRESHOLD: The minimum population needed to
make a service viable for a particular place.
• If this size is not reached then a particular activity will not start
of it will be closed down
• RANGE: The maximum distance a consumer is willing
to travel to purchase a good or avail a service
• Beyond this distance the consumer will not travel, since the
distance travelled will outweigh the benefit of the good

• A central place is a settlement which provides one or more services for the
population living around it
• The sphere of influence is the hinterland area in direct influence of the Central Place
• From these concepts, the lower and upper limits of goods and services can be found,
and we can see how central places are arranged in an imaginary area
 Central Place Theory
• Sizes of settlements: Christaller gave a
system with sizes of settlements based on
population.
• The rank order of central places in
ascending order is:
• 1. Hamlet
• 2. Village
• 3. Town
• 4. City
• 5. Regional Capital / Metropolis
• Markets and services tend to be nested
hierarchies with smaller towns serving
smaller markets.
• However, transportation and border effects
can shift the distribution of towns away
from theoretical uniformity
Sphere of influence is 3 times Sphere of influence is 4 times Sphere of influence is 7 times
for Marketing principle for Transport principle for Administrative principle
Thank You