Regional Economics + Land Rent theory - part 2

Theory of development stages

The theory of development stages related to an important claim in the 1950s: the sectoral composition of a region explains its rate of growth.

Shift-share analysis

Shift-share analysis is a statistical method for determining a region's relative growth rate. At the basis of this theory is the idea that regional growth rate is influenced by three factors: industrial structures, sectors' productivity, dynamics of demand, and consumer preferences.

Assumption: The same sectors have the same productivities regardless of the location - the region has the same sectoral composition as the country as a whole. On this assumption, the region’s rate of growth should be equal to that of the country. However, the region’s growth rate always differs from the value it should assume:

Δy_g = Δy_c + Δ

The difference between the national and regional growth rates is called shift. The shift means that our region grows in a different way than the nation (if Δ is positive, the region grows more than the nation, and the other way around). This difference is due to:

Composition effect - Mix effect

This is due to the presence in the region of sectors with more marked dynamics at national level due to increasing demand in these sectors. It’s an exogenous effect: depends on the demand, it doesn’t depend on the capacity of the region. This effect is due to the fact that in that period, you have the right mix of sectors.

Competition effect - Differential effect - Shift

It derives from the regional economy's capacity to develop each of its sectors at greater average rates than those achieved by the corresponding national factors. It's a comparison of the same sectors across the regions. It’s a difference between good’s quality. It’s a supply effect - because of the quality of the goods produced in the region: endogenous effect, depends on the supply.

Both shift and share are present simultaneously, that’s why it’s called shift/share analysis. This theory highlights the aspects that the development stages theory ignores:

• Differing productivity of the same sector in different areas: DIF
• Each sector’s contribution to regional growth differentiates

This approach has the ability to distinguish between structural factors (MIX effect) and short-term ones (DIF effect).

Short-term effects (DIF effect)

X = national rate of employment growth

β = regional rate of employment growth

Each sector is represented by a point indicating its growth at regional and national level. The 45° point is where the sector records a rate of regional growth equal to the national. All points above the bisector grow more in the region than in the nation - has a positive DIF.

National average rate of growth - - - -

Regional average rate of growth - - - -

Those are relative concepts: it is the comparison between

R/N_mix = ∑_i=1ⁿ[(EiR/ER) (Ein/EIN) - EN/ENⁿ]

DIF = ∑_i=1ⁿ[(EiR/ER) (Ein/EIN) - Ein/EIN_β]

The theory of development stages related to an important claim in the 1950s: the sectoral composition of a region explains its rate of growth.

Shift-share analysis (continued)

Shift-share analysis: a statistical method for determining a region's relative growth rate. At the basis of this theory is the idea that regional growth rate is influenced by three factors: industrial structures, sector productivity, dynamics of demand, and consumer preferences.

Assumption: The same sectors have the same productivities regardless of the location. The region has the same sectoral composition as the country as a whole. Under this assumption, the region's rate of growth should be equal to that of the country. However, the region's growth rate always differs from the value it should.

Region = Country g = income possible rate

Assume: Δ y_g = Δ y_c ± Δ

The difference between the national and regional growth rates, it's called shift.

The shift means that our region grows in a different way than the nation (if Δ is positive, the region grows more than the nation, and the other way around). This difference is due to:

• Composition effect - Mix effect: due to the presence in the region of sectors with more marked dynamics at the national level due to heterogeneity among these sectors. It's an exogenous effect: depends on the demand, it doesn't depend on the capacity of the region. This effect is due to the fact that during that period, you have the right mix of sectors.
• Competition effect - Differential effect: Shift/mix: ∑_i=1ⁿ (Eir/Er_i - Ein/En)
• DIF: ∑_i=1ⁿ (Eir/Er_i - Ein/En)

It derives from the regional economy's capacity to develop each of its sectors at greater average rates than those achieved by the corresponding national sectors. It's a component of the same sectors across the region. It's a difference between good's quality. It's a supply effect - because of the quality of the goods produced in the region: endogenous effect, depends on the supply.

Both shift and share are present simultaneously, that's why it's called shift/share analysis.