Regional Economic Modeling in Theory and in Practice

There is a rich body of literature in the study of regional economics concerned with industry and household location theory or, more generally, spatial economic theory. Yet, most models of regional economies are not based on this spatial theory. Instead, they either employ non-theoretical techniques or techniques appropriate for economic base theory. The essence of spatial theory is that firms choose locations in order to maximize profits and that households choose locations in order to maximize utility. Therefore, the size, make-up, and viability of regional economies is the outcome of these location decisions. The essence of economic base theory, on the other hand, is that changes in regional economies are determined by changes in exogenous demand, particularly export demand.

The focus of this book is how to build a multiregional forecasting model consistent with spatial theory. We argue that it is necessary to rely upon a location theory model rather than upon an economic base theory model for long-term forecasting and impact analysis. Our positions are that a model based on location theory can capture the basic behavior characteristics of firms and households that are apt to remain stable over time, and that the assumptions inherent in economic base models restrict their usefulness to short-term analysis. Since assumptions are different in the economic base and spatial theory approaches, the selection of a regional model to build or use depends on the researcher’s or user’s objectives.

All that we have to say about the non-theoretical approaches is given in this Chapter. The economic base theory approach is presented in Chapter 2 and the location theory approach is presented in Chapter 3. The general discussion in Chapters 2 and 3 does not refer to particular models, but in Chapter 5 there is a description of a location theory model developed by the authors. Chapter 4 is a transition from Chapter 3 to Chapter 5, reviewing the choices and decisions that a researcher has to make in order to go from location theory to an operational model based on location theory.