The Economics of The Economics of Urban Growth Urban Growth

Dr. Adnan A. AlshihaDr. Adnan A. Alshiha

Determinants of the Determinants of the Growth processGrowth process

• The distribution of resources.The distribution of resources.

• Relative mode of production.Relative mode of production.

• Level of demand.Level of demand.

• The efficiency of price system.The efficiency of price system.

The Principles of The Principles of Location AnalysisLocation Analysis

• People want to locate where they can People want to locate where they can maximize their satisfaction.maximize their satisfaction.

• Producers desire to locate where their Producers desire to locate where their profit are expected to be maximize.profit are expected to be maximize.

• Producers motives are more importantProducers motives are more important than worker motives. than worker motives. WhyWhy? Because:? Because:

Businessman has more to lose.Businessman has more to lose. More change in the pattern that More change in the pattern that

determine firm preferences than the determine firm preferences than the pattern that determine consumers pattern that determine consumers preferences. preferences.

The Principles of The Principles of Location AnalysisLocation Analysis

• We begin with producers decision.We begin with producers decision.• Production processProduction process is consist of is consist of

three stages:three stages:Procurement.Procurement.Processing.Processing.Distribution.Distribution.• Procurement and Distribution Procurement and Distribution

have a common determinant: have a common determinant: transportation costtransportation cost

Transfer Cost and Firm Transfer Cost and Firm LocationLocation

• The reduction of transfer costs is a strong The reduction of transfer costs is a strong incentive to concentrate the three stages incentive to concentrate the three stages of production at a single point in space.of production at a single point in space.

• Transfer cost must be consider in relation Transfer cost must be consider in relation to distance.to distance.

• For given modes of transportation, For given modes of transportation, transfer cost per unit of product increase transfer cost per unit of product increase with distance.with distance.

• But at longer distance , the increase begin But at longer distance , the increase begin to tail off.to tail off.

• In other word, In other word, as distance increases , the as distance increases , the marginal costmarginal cost of shipping a good anther of shipping a good anther kilometer kilometer declinedecline. .

Transfer Cost –Distance Transfer Cost –Distance RelationshipRelationship

Barge

Rail

Truck

DistanceDistance

Tra

nsf

er c

ost

Tra

nsf

er c

ost

How Do Transfer Cost Affect How Do Transfer Cost Affect Individual Producer?Individual Producer?

• Consider a producer (bakery) in single Consider a producer (bakery) in single linear market, where neither the volume linear market, where neither the volume of business nor his processing cost varies of business nor his processing cost varies with his location.with his location.

• The bakery hires a boy for deliveries and The bakery hires a boy for deliveries and the boy can carry only one customer’s the boy can carry only one customer’s order at a time.order at a time.

• Where the firm locate to minimize the boy Where the firm locate to minimize the boy trips?trips?

• The mean or Average distance?The mean or Average distance?• The mode?The mode?

Single Materials and Single Materials and Market site Location Market site Location

Problem Problem • If the marginal procurement cost If the marginal procurement cost

exceeds the marginal exceeds the marginal distribution costs, it will pay to distribution costs, it will pay to locate at the material site.locate at the material site.

• When firm’s market are cities When firm’s market are cities and the marginal procurement and the marginal procurement cost relatively low, we would cost relatively low, we would expect firms to locate in cities expect firms to locate in cities

Single Materials and Single Materials and Market site Location Market site Location

ProblemProblem

DistanceMaterial Site

Market Site

Distribution

ProcurementTotal Transfer Costs

Single Materials and Market site Single Materials and Market site with Terminal Cost and Transfer with Terminal Cost and Transfer EconomiesEconomies

Total Cost

DistributionProcu

rement

Distance

Single Materials and Market Single Materials and Market site with Terminal Cost and site with Terminal Cost and

Transfer EconomiesTransfer Economies• It will pay producer to locate at the It will pay producer to locate at the

material site or the market site. For at material site or the market site. For at these points the firm could save terminal these points the firm could save terminal cost on materials or the final product.cost on materials or the final product.

• In general , producers will be oriented In general , producers will be oriented toward markets when the product:toward markets when the product:

• 1- is weight – gaining manufacturing, as 1- is weight – gaining manufacturing, as beer.beer.

• 2- has higher transfer costs on 2- has higher transfer costs on distribution , than on procurementdistribution , than on procurement

• 3- is perishable, as are ice , baked goods, 3- is perishable, as are ice , baked goods, and fresh agricultural product. and fresh agricultural product.

The Location Decision of The Location Decision of PersonsPersons

• Firms motives are more important in Firms motives are more important in determining the location of economic determining the location of economic activities than person’s motive.activities than person’s motive.

• It follows, that people will tend to be It follows, that people will tend to be “pulled” to the center or areas of rising “pulled” to the center or areas of rising economic activity.economic activity.

• People will be “pushed” away from areas People will be “pushed” away from areas having low levels of income per capita or having low levels of income per capita or wage rate and high unemployment level.wage rate and high unemployment level.

• ““pull” and “push” factors diminish as pull” and “push” factors diminish as distance between the two cities distance between the two cities increases (people have lee information).increases (people have lee information).

• These ideas can be expressed in simple These ideas can be expressed in simple gravity model. gravity model.

Models of Urban GrowthModels of Urban Growth

• A short – Run Model Income A short – Run Model Income Determination.Determination.

• Urban Economic Base Models.Urban Economic Base Models.

• Central – Place Models.Central – Place Models.

• Input-Output Models. Input-Output Models.

A short – Run Model Income A short – Run Model Income DeterminationDetermination

• The Keynesian multiplier: reciprocal The Keynesian multiplier: reciprocal of the quantity (1 minus the marginal of the quantity (1 minus the marginal propensity to consume).propensity to consume).

• When any given change in spending When any given change in spending is multiplied by the multiplier , one is multiplied by the multiplier , one get the final change in income.get the final change in income.

• Example:Example:• If people spend ¾ of any given If people spend ¾ of any given

change in their income, the multiplier change in their income, the multiplier will have a value ofwill have a value of

• 1/(1-3/4)1/(1-3/4)

A short – Run Model Income A short – Run Model Income DeterminationDetermination

• Aggregate income or production Aggregate income or production (Y) =the sum of consumption (C), (Y) =the sum of consumption (C), Investment (I), Government Investment (I), Government expenditure (G), and net export expenditure (G), and net export (X).(X).

Urban Economic Base ModelsUrban Economic Base Models

• The economy of the city may be The economy of the city may be divided into two sectors:divided into two sectors:

1- The exporting or basic sectors.1- The exporting or basic sectors.

2- The service or non-basic sector.2- The service or non-basic sector.

• The basic sector is the key to growthThe basic sector is the key to growth

Basic and non-basicBasic and non-basic

• 1- The exporting or basic sectors: 1- The exporting or basic sectors: • bring income into the city by selling bring income into the city by selling

goods and services outside the city goods and services outside the city

• 2- The service or non-basic sector 2- The service or non-basic sector whose output sold within the citywhose output sold within the city

Economic-Base StudiesEconomic-Base Studies

• Base studies were done by Base studies were done by estimatingestimating the amount of the amount of employment that was used to employment that was used to produce goods and services sold produce goods and services sold outside the city. outside the city.

Methods of estimating Methods of estimating “export employment” “export employment”

• The location quotientThe location quotient

• The minimum-requirementThe minimum-requirement

The location quotientThe location quotient

• For any sector is found by comparing For any sector is found by comparing that sector’s share of the total that sector’s share of the total employment in the city with the share employment in the city with the share of employment for that sector in of employment for that sector in benchmark area.benchmark area.

• Example:Example:• If the chemical sector in a given city has If the chemical sector in a given city has

20% of the city’s total employment20% of the city’s total employment• While chemical share of total While chemical share of total

employment in Saudi Arabia is only 10%employment in Saudi Arabia is only 10%• This method allocate ½ of the chemicals This method allocate ½ of the chemicals

employment in the city to export. employment in the city to export.

The minimum-The minimum-requirementrequirement

• Involve arraying the Percentage of total Involve arraying the Percentage of total employment of industry for number of cities.employment of industry for number of cities.

• Cities are grouped according to population Cities are grouped according to population size classsize class

• The percentages are arrayed from smallest The percentages are arrayed from smallest to largest.to largest.

• The lowest percentage is considered that The lowest percentage is considered that share of employment rquired to service local share of employment rquired to service local needs.needs.

• The remaining employment is said to be The remaining employment is said to be basic.basic.

Change Change

Non - BasicBasic

Wage

S

D”

D

S”S

Employment Employment

Central – Place ModelsCentral – Place Models

• Explain the size , number, and Explain the size , number, and distribution of towns across distribution of towns across space.space.

• The word central comes from the The word central comes from the relatively efficient location of the relatively efficient location of the city with respect to its city with respect to its hinterland.hinterland.

Degree of CentralityDegree of Centrality

• Is measured by its order.Is measured by its order.

• High-order citiesHigh-order cities offer high-order goods, offer high-order goods, have many establishment , large have many establishment , large population, and a vast hinterland.population, and a vast hinterland.

• High-order good: are shopping goods the High-order good: are shopping goods the consumer would travel a sizable distance consumer would travel a sizable distance to purchase (mink coats, diamond, to purchase (mink coats, diamond, professional sport).professional sport).

• Lower-order places: provide Lower-order places: provide lower-order good to small lower-order good to small surrounding areas.surrounding areas.

• Lower-order goods are primary Lower-order goods are primary necessities, such as groceries necessities, such as groceries and gasoline, which require and gasoline, which require frequent purchase with minimal frequent purchase with minimal traveltravel

Origin and Size of Central Origin and Size of Central PlacesPlaces

• Are explained by two concepts:Are explained by two concepts:

• ThresholdThreshold: is the minimum level of demand required : is the minimum level of demand required to support the production of good by (at least) a to support the production of good by (at least) a single establishment.single establishment.

• Once production is originated for any good , how far Once production is originated for any good , how far does the market extend? This is determined by the does the market extend? This is determined by the rangerange..

• The rangeThe range: delineates the zone around any central : delineates the zone around any central place from which a person travel to obtain the good.place from which a person travel to obtain the good.

• Since the price of any good rises with distance the Since the price of any good rises with distance the range is limited by the relevant transportation cost.range is limited by the relevant transportation cost.

• Technically, the boundary of the range is that point in Technically, the boundary of the range is that point in space where a person is indifferent in choosing space where a person is indifferent in choosing between two central places that offer the same good. between two central places that offer the same good.

Input-Output ModelsInput-Output Models

• Describe the interrelationships among Describe the interrelationships among industries and final users of products for industries and final users of products for any economy.any economy.

• Industries are defined on product basis, Industries are defined on product basis, each industry produce a single each industry produce a single homogeneous product.homogeneous product.

• Final users (final demand): consumer, Final users (final demand): consumer, government, investors and export.government, investors and export.

• The model shows how the output of each The model shows how the output of each industry is distributed to all of its users. industry is distributed to all of its users.

• The model also show the purchases of The model also show the purchases of inputs from all other industries or sectors.inputs from all other industries or sectors.

The Input-Output TableThe Input-Output Table

Sector 1Sector 1 sector2sector2 Final Final demanddemand

Total Total Gross Gross outputoutput

Sector 1Sector 1 SR.20SR.20 SR.40SR.40 SR.40SR.40 SR.10SR.1000

sector2sector2 3030 8080 9090 200200

Value addedValue added 5050 8080

TGOTGO 100100 200200

300300

Purchase from

Sale to

Direct coefficient Direct coefficient per Riyal of Outputper Riyal of Output

Sector 1Sector 1 Sector 2Sector 2

Sector 1Sector 1 0.20.2 0.20.2

Sector 2Sector 2 0.30.3 0.40.4

Value Value addedadded

0.50.5 0.40.4

Direct and indirect Direct and indirect requirements per Rial of requirements per Rial of delivery of Final Demand delivery of Final Demand

Sector 1Sector 1 Sector 2Sector 2

Sector 1Sector 1 1.431.43 0.480.48

Sector 2Sector 2 0.710.71 1.901.90

Impact Impact MultipliMultiplierer

2.142.14 2.382.38

Distributional Impact Distributional Impact of Urban Growthof Urban Growth

• How income is distributed?How income is distributed?

• The importance of This issue to The importance of This issue to contemporary urban poverty and contemporary urban poverty and other problem is self-evidence other problem is self-evidence

• In general, the distribution of In general, the distribution of income is determined by how income is determined by how things are produced and the taste things are produced and the taste of consumers. of consumers.

Is urban Growth Is urban Growth Immutable?Immutable?

• The urban size ratchet: the rate The urban size ratchet: the rate growth never fall bellow zero.growth never fall bellow zero.

• This is a reasonable explanation This is a reasonable explanation why big cities continue to grow why big cities continue to grow

Is There an Optimum Is There an Optimum Sized City? Sized City?

• Demand and comparative advantage act as limits on Demand and comparative advantage act as limits on the size of cities.the size of cities.

• The problems of pollution, congestion, and The problems of pollution, congestion, and interjurisdictional spillover could be classified as interjurisdictional spillover could be classified as possible symptoms of excessive urban size.possible symptoms of excessive urban size.

• Optimal city size is reached when the additional Optimal city size is reached when the additional social benefits of adding anther person to the city social benefits of adding anther person to the city are exactly equal to the additional social cost.are exactly equal to the additional social cost.

• That is , when the marginal social utility of adding That is , when the marginal social utility of adding anther person is zero anther person is zero