Multipler Effects And Structural Change: Applying Economic Base Analysis To Small Economies

Multiplier models (economic base, input†output, Keynesian) implicitly assume that pre†impact and post†impact interindustry transaction patterns are, for all practical purposes, identical. However, in very small regional economies this assumption is invariably violated because the economy undergoes a structural transformation during the impact process. That is, the economy often clearly shifts away from one functional type (e.g., service†oriented) toward another functional type (e.g., manufacturing†oriented) during the economic impact. Using marginal economic base analysis this paper outlines a model for predicting small†area impacts that captures not only the traditional multiplier effect but other effects related to (i) employment†based structural shifts and (ii) nonemployment†based contextual shifts. Algebraic and numerical derivations are given for the expected employment shifts in a hypothetical impacted economy. All numerical results follow from an earlier statistical analysis of the Arizona Community Data Set (ACDS).