LOCATION QUOTIENT TECHNIQUE

The Location Quotient Technique is the most commonly utilized economic base analysis method. It was developed in part to offer a slightly more complex model to the variety of analytical tools available to economic base analysts. This technique compares the local economy to a reference economy, in the process attempting to identify specializations in the local economy. The location quotient technique is based upon a calculated ratio between the local economy and the economy of some reference unit. This ratio, called an industry "location quotient" gives this technique its name.

 

Unlike the Assumption Technique, the Location Quotient Technique does not assume that ALL employment in each industry is Basic or Non-Basic. Instead, location quotients are calculated for all industries to determine whether or not the local economy has a greater share of each industry than expected when compared to a reference economy. If an industry has a greater share than expected of a given industry, then that "extra" industry employment is assumed to be Basic because those jobs are above what a local economy should have to serve local needs.

For example, suppose a local economy has 5% of its workforce in computer manufacturing and the national economy has only 0.05% of its workforce in computer manufacturing. This technique assumes that the local economy would have that same percentage of its workers in the computer manufacturing industry to serve its local needs for computers. Any employment over and above the expected percentage (in this case 0.05%) is therefore considered to consist of basic sector jobs because these workers are assumed to be exporting their goods and services to non-local areas. If the percentages had been identical or if the local percentage had been lees than the reference percentage, then the analyst would conclude that the local area has no basic sector employment for that industry as the area can only, at best, meet their local demand and not export these goods and services.