Location Quotient Calculation Shows Local Economic Strengths

The economic base consists of the businesses that bring net income to your community beyond what is consumed there. It's critical to understand and increase your economic base, which makes you prosperous.

Businesses that sell all or most of their product to locals, such as many restaurants and grocery stores, are vitally important but not part of your economic base.

We know your chamber of commerce might talk as if all businesses are equally wonderful, but the truth is that the ones that bring in outside money are the economic activities that promise improved economic circumstances, not just running in place.

Figuring out the location quotient, sometimes simply written as LQ, in various ways is often an eye-opening experience for communities who want to understand more about their economic prospects.



The do-it-yourself economic base study has become relatively easy in the U.S. Typically the economic base study is done at the county level. First, set aside some time; this is going to take more than 5 minutes, OK?

The goal of this exercise is to find the economic sectors where the percentage of your total employment in a particular category exceeds your state's percentage or the national percentage in that category. Employment is used as an indicator of the entire economy.

Where you are under the average may show opportunity, especially if it's a retail category, but it doesn't count toward the economic base.

As you know from school, a quotient is the result of a division problem. Your economic base consists of those sectors that have a location quotient of greater than 1.0.

This means that your county's percentage of employment in that economic sector was greater than the percentage of employment in that sector in the comparison economy, either the state or nation.

On the Internet, go to something called the location quotient calculator on the Bureau of Labor Statistics website. There you can select your county and then choose to compare it to your state or the national economy.

You also can compare your county at any level of economic sector detail you want. The most general level you would want to consider is two digits, and the most detailed level available is five digits. After you've made a few selections, the website pops up with a chart that shows quotients both greater than 1 and less than 1.

Most communities where I've done these studies obtain the greatest insights through comparisons to their state.

However, sometimes people overlook the obvious, so if you're in a touristy state such as Florida, you might want to compare yourself to the U.S. to understand the full import of your tourism industry.

But if you want to see if you're the most touristy in Florida, compare yourself just to Florida. Think about this example and you'll see the difference.

Where you see a higher percentage of employment in a particular sector in your county than in the nation or state, that's your economic base. Not the latest taco stand.

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