2008 Comprehensive Economic Development Strategy

Appendix 7 - Assumptions in Location Quotient Approach

The first is the assumption that there is no cross hauling. The assumption is that a
community will first use a product from the local economy and then export the rest. The
community will not import a product that they produce for export. This is not true
because a local economy may import a different brand of product or may import a
product that is within the same industry for which they export. The problem with the
assumption gets larger when there is greater product mix and the industries are
aggregated and not well refined. The second assumption is that the national economy is
self-sufficient and that the nation does not import or export items outside the nations
boundaries. This is problematic because the world is becoming increasingly global and
the United States is a major trade partner with several other countries. The third
assumption is that there is an equal amount of productivity across regions. This
assumption can only be made if it is known that the rate of productivity is equal for one
region compared to another. This is a problem related to using employment as a measure
because it accounts only for the number of workers and not their efficiency. The last
assumption made when using the location quotient approach is regions have equal
consumption patterns. One region may have a need or preference for a product and that
will effect the consumption of the product for the area and, in turn, may affect the
location quotient. This can be adjusted for by taking into account income share. Although
there are flaws with this method, the location quotient does serve as an indicator of an
industry compared to other places in the United States and can be an effective tool in
measuring the strength of a regional economy.

Prepared by Genesee/Finger Lakes Regional Planning Council

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