A Location Quotient evaluates the degree that a region specializes in a certain industry (j) by comparing the ratio of employment (E) within the industry in the region (R), PDDs and EDDs in this case, to national (N) or state (S) employment within the industry. This percentage is compared to the ratio of total regional employment to total national employment. This ratio of ratios is (ERj/ENj)/(ER/EN) for the location quotient relative to the nation and is (ERj/ESj)/(ER/ES) for the location quotient relative to the state. There is also a location quotient comparing the state of Arkansas to the nation, (ESj/ENj)/(ES/EN).
If the calculated value exceeds one, the industry is presumed to be an exporter, while values less than one imply imports.1 This may not actually be the case, however. Local demand for a good may be much higher than would normally be expected given these sectors' national shares, leaving nothing to export.2 Another consideration is sectors that do not export directly, such as construction and related sectors. Although these sectors do not export directly, employment in these sectors induces growth through multiplier effects.3
Even though a location quotient is high, a sector may still not be a significant portion of employment in the region. For example, the highest location quotient for the state of Arkansas in 1992 is 4.50 in Leather and Leather Products. The high location quotient indicates that Arkansas is an exporter in this sector. However, Leather and Leather products represented only 0.4 percent of total employment in Arkansas in 1992. The location quotient is high because 1992 national employment in this sector was 0.09 percent of total employment. Although the location quotient in this sector is high, it is obvious that this sector makes only a small contribution to the state economy.
It is important to consider the contribution that a sector makes to the total economy while evaluating the information derived from location quotients. One indicator of overall contribution is the percentage of total employment within the region. Other indicators of contribution could include measures of income, plant openings, and demographic data.
_______________________________
1 David A. Krueckeberg and Arthur L. Silvers, Urban Planning
Analysis, New York: J. Wiley, 1974, p. 397.
2 Arthur L. Silvers and John Shelnutt, "Sectoral Bases of
Economic Growth in Arizona: 1967-1986," Arizona Review,
Spring, 1987, pp. 19-35.
3 Silvers and Shelnutt, op.cit.
This page was compiled by the Institute for Economic Advancement and funded in part by the Economic Development Administration.