(export) sector of a region produces a multiplier response in the nonbasic secondary sectors. There are two effects responsible for this multiplier response. First, an ’’indirect” effect occurs as the exporting firm, in order to expand (or initiate) production, purchases raw and intermediate goods from existing firms in the region. Secondly, an ’’income-induced” effect occurs as increased production in the firms directly and indirectly stimulated is translated into increased consumer demand for, and hence production of, the goods and services provided by the retail, commercial, and service sectors of the region. 3.2.1 The Causal Relationship between Export-Base Employment and Population Change Export-base theory has been used by economists and regional analysts to explain the relationship between exogenous increases in export sector activity and the growth in employment and population within a region. As a first step in this process, estimates of the size of the multiplier effect (the indirect and income-induced changes in the secondary sector consequent to exogenous changes within the basic sector) must be made. The manner in which these multipliers are derived varies considerably in sophistication. Equation 1 illustrates a simple ratio approach to multiplier estimation. where: a measure of total (basic and secondary) economic activity in region i at time period t, the measure of economic activity in the basic sector in region i at time period t, and the "multiplier” for this measure of economic activity in region i. When the measure of economic activity selected is employment, M2 is termed the regional employment multiplier. It reflects the previous regional response of changes in total employment (basic plus secondary) to increases (or decreases) in basic employment and is used to project the basic to secondary relationship for given future changes in basic employment. Multiplying annual (or period) exogenous changes in basic employment due to industrial relocation or expansion by M1 provides a measure of the total employment response (basic plus secondary) within the region.
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