RURAL ECONOMIC DEVELOPMENT: ALTERNATIVES IN THE NEW COMPETI TIVE ENVIRONMENT

Investigators: Cooke, S. C.

Performing Department: AGRI ECONOMICS & RURAL SOCIOL -- 0790

Start Date: 10/01/1997 Termination Date: 09/30/2002
Reporting period: 01/01/2000 to 12/31/2000

Progress Report:
This research contributes to the general equilibrium literature as it applies to regional economics. In particular, it provides an accurate and coherent way to hypothesize the effects of a policy shock on the tradable and non-tradable sectors of a regional economy. The tradable and non-tradable distinction is important conceptually both to understand a regions economic behavior and to model the effects of a change in policy correctly. The proposed property tax reduction in Idaho was analyzed using this approach. The results provide testable hypotheses on the likely impact on this state's tradable and non-tradable sectors and the associated income distributive effects from a tax reduction. By contrast, other economists divide the economy into goods and services. The goods/services distinction is convenient but conceptually incorrect. These categories are approximations of the theoretically correct distinction of tradable vs. non-tradable sectors. The categories of goods and services are an approximation in the sense that some service products assumed to be non-tradable like electricity or financial services are tradable. The tradable/non-tradable sector distinction is critical because the price responsiveness is based on differences in the demand structures that each sector faces. For tradable goods and services we assume: 1) more of the demand tends to be located outside the region, 2) the regional price conforms more nearly to the national and international price, and 3) demand is more elastic from the point of view of regional producers. We assume the opposite for non-tradable goods and services. These assumptions are not justified for goods and services sectors per se but only as they approximate tradable and non-tradable sectors. This is a subtle but important distinction. Our analysis clearly follows the conceptual assumptions made about the differences in price elasticities for the traded and non-traded sectors. The traded sector derives greater benefit from the property tax cut than the non-traded sector. This is a function of both the property tax rate (burden) on each sector and the elasticity of demand for their products. We can tell a coherent story of the effect of a tax cut. The traded sector increases its demand for labor and it bids capital away from the non-traded sector. Output increase in the traded sector is greater than in the non-traded sector. Household income in the region goes up and this in turn is more beneficial to the non-traded sector than to the traded sector. However, the traded sector is able to increase exports by much more than the non-traded sector because a larger part of demand for the traded goods and services is more elastic than it is for the non-traded sectors.

Publications:
(No publications reported.)

Impact:
Our model provides the correct conceptual insight into why it is important in regional economics to expect differential impacts of public policies on traded and non-traded price responsiveness in different parts of the regional economy.