Location Quotients Economics

1. Location Quotients
It seems to me that
almost every
stripmall has a nail
shop in it.
It makes me
wonder…how
many of these
shops do we
need? How many
is too many?!?
One way to
measure this idea
is using location
quotients.
A location quotient
measures how well
represented an
industry is in a
particular area.
Click to see an
example!

2. Let’s apply the concept of a
location quotient in a beach town
A location quotient (LQ) is a measure of how concentrated an industry is in
a particular geographic area
For example, ice cream stores are heavily
concentrated in ocean front communities!
Can you think of another industry that is
heavily concentrated in ocean front
communities?
I bet you
guessed
“hotels”,
“restaurants”, or
maybe even
“Salt Water Taffy
stores”!

3. Let’s explore location quotients
In this unit, you’ll learn what a location
quotient is, how to calculate it, and (most
importantly) how it can be used.
Keep in mind that location quotients can be
calculated for a small area like a county or a
larger area like a region.
So before we begin, let’s define a region…

4. First of all, what is a region?
• A region is a geographic area that is
connected economically.
• The U.S. government refers to regions
as “Metropolitan Statistical Areas” or
“MSAs”.
• A Metropolitan Statistical Area
contains a core urban area of 50,000
people and can contain nearby
counties.
• They also include adjacent counties
that have a high degree of social and
economic integration (as measured by
commuting patterns).
This is an image of the future Dubai City and its
tallest building in the world. It will be almost 2,000
feet tall, surpassing the Sears Tower by 260 feet.
Clearly this is a “core urban area”.

5. There are about 330 MSAs in the U.S.
The nation’s 330 MSAs can be
seen on this map. Each is
shaded a different color. Some
include one county, others
include several counties.
Not every county is in an
MSA…but then again, not every
county has 50,000 people in it.
In fact, most of these counties do
not.

6. Where do we live?
Our region is nicknamed “Hampton
Roads” or “Tidewater” but is
technically known as the Virginia
Beach-Norfolk-Newport News MSA
It includes about 1.6 million people
living in these cities and counties.
Our population is about 0.6% of the
U.S. population.

7. Why do we study regional economics?
Because regions (i.e. MSAs) are the heart of our economy.
Regions are the source of much of our culture.
Regions are our economic centers.
Economically, regions are quite important.
Only about 25% of U.S. counties are in an MSA, yet those
counties hold 85% or our jobs and 83% of our
population!

8. Let’s use location quotients
to analyze a region
In the next few slides we will:
• Compare incomes in all MSAs
•Determine that the Bridgeport-Stanford-Norwalk
MSA has the highest income
•Calculate LQs for the Bridgeport-Stanford-
Norwalk MSA
•Calculate LQs for Hampton Roads (Virginia
Beach-Norfolk-Newport News MSA)

9. One economic measure of a
region is its incomes per person
Hampton Roads is ranked 108th
Note that Bridgeport-Stamford-Norwalk had
the nation’s highest income in 2004

10. Bridgeport-Stamford-Norwalk, CT
So where is Bridgeport-
Stamford-Norwalk?
And what is going on there to
make incomes so high?
Their region includes 0.3% of the U.S. population
and employment but has incomes and earnings
that are well above the national average.
Just to give you
geographic
perspective…This area
is very close to New
York City.
Let’s use LQs to figure out why their
income is so high!

11. Employment in Bridgeport, CT
So what kind of jobs do they
have there?
But how can I compare that
with the nation?
‘Looks like they are big on
health care and retail.

12. Comparing Bridgeport to the U.S.
First, we can
compare total
employment in
each industry in
Bridgeport-
Stamford-
Norwalk with the
U.S.
Obviously, the
number will be
smaller.
Note the “D” for Mining and Construction. D stands for “disclosure” which means there weren’t enough firms to
disclose the information. If there are only two firms and I own one, then I can figure out what the other is doing given
this information. To protect privacy, the data aren’t released. This point is unimportant for our work.

13. Calculating share of employment
in each industry
Then shares
of total
employment
can be
calculated for
each industry.
These shares
can be used
to calculate
location
quotients.
We’ll practice
calculating an
LQ on the
next slide.
Here we see that
only 0.1% of
people in the
Bridgeport-
Stanford-
Norwalk MSA
work in Forestry
& fishing.
That is less than
the national
average (0.6%)
but that
shouldn’t
surprise
us…Bridgeport
is urban
0.1% was calculated by dividing 381 by total employment in the MSA, which is 547,097.
381/547,097=0.1% when rounded.

14. Imagine “Anytown” has 500 employees in
ice cream shops and 2,000 employees total.
Calculating Location Quotients
Here is a hypothetical example:
In other words, Ice cream
stores are 5 times more
concentrated in Anytown
than the rest of the nation!
In other words, 25% of employment in
Anytown is in an ice cream shop.
Now imagine that in the entire country, there
are 10,000 people working in ice cream
shops and 200,000 people working in total.
In other words, the share of people working
in ice cream shops in the country is 5%
(which is 10,000 divided by 200,000)
To get Anytown’s Location Quotient for ice
cream shops, simply put 25% over
5%...which is 5!

15. Interpreting the Location Quotient
LQ= 0 LQ= 0.5 LQ= 1.0 LQ= 1.5 LQ= 2.0 LQ= 2.0+
Industry is UNDER
represented in my area
Industry is OVER
represented in my area
The
industry is
nonexistent
in my area
Industry is half
as
concentrated
in my area
than in the
nation.
The local
concentration is
the same as
the nation’s.
Industry is 50%
more
concentrated
locally than it is
nationally.
Industry is
substantially more
concentrated
locally than it is
nationally.
In other words, there aren’t many
businesses competing in this
area…could be an opportunity for
me!
In other words, the field is
crowded…I’d better make sure I
know what I am getting into if I
want to survive as a business.

16. Let’s return to Bridgeport-
Stamford-Norwalk
Make sure you understand how the last column is calculated!
With an LQ of less
than one, clearly,
forestry & fishing
is
underrepresented
in Bridgeport.
With an LQ of
2.46, we see that
Bridgeport
specializes in
management.

17. It is now easy to see why the
incomes in Bridgeport are high!
Note that employment in
Bridgeport is concentrated in
high wage industries.
No wonder their per capita
income is so high!!

18. Individual exercise
• Try to determine what you think will be the
Hampton Roads region’s top three leading
industries are (as measured by the
location quotient).

19. If you guessed Military, you
are correct!
Calculating location quotients
Here are the areas of
strength for Hampton Roads

20. Try this exercise to make
sure you understand!
Click to see the answers.
What do you think this town
might look like?

21. How can you use this information
• Determine an area’s strategic
strengths
– An industry may perform better in
certain areas
• Determine if an industry is
underrepresented
– If your area has a low LQ, the area
may need more firms in that industry
• Determine if an industry is
overrepresented
– If you open a business in an area
with a high LQ, your business will
face a lot of competition and may fail

22. OK…so how do I determine
a location quotient ?
Step 1: Select the geography
Go to: http://www.census.gov/econ/cbp/index.html
Use this box to change
geography. That will
allow you to collect
employment data for
your local MSA. You
can select any area in
the U.S.
You might also select a
county if you want better
detail.

23. Determining location quotients
for your business proposal (continued)
Step 2: Collect the employment data
Go to: http://www.census.gov/econ/cbp/index.html
The is total Employment
in the area for 2008
Use the detail button to
“Drill Down” on your
employment data using
your NAICS Code

24. Determining location quotients
for your business proposal (cont.)
Step 3: Select the geography
Go to: http://www.census.gov/econ/cbp/index.html
Use this box to collect
data for the US. You’ll
see total employment at
the top of that table and
have to click “detail”
next to your NAICS
code to get industry
data.

25. Determining my LQ
636,795
120,903,551
378
56,159
LQ = 1.16
Here is the actual data for pet sitting (NAICS
812910), assuming I am consider opening a business
in the Virginia Beach-Norfolk Newport News MSA:
There were 378 pet
sitters in Hampton
Roads in 2008.
There were 636,795
employees in Hampton
Roads in 2008.
There were 56,159 pet
sitters in the U.S. in
2008.
There were 120,903,551
employees in the U.S. in
2008.
It is up to you to interpret
this number!!!

26. Keep this in mind!
Navigating these databases can be
difficult and frustrating.
If you think you gave it your best shot
and want some help…email or call.
slacroix@tcc.edu …. 757-771-8009