Short-Run Income Models
This chapter starts the authors's journey through the mesoeconomic theories with a simple production possibilities model. It describes the concepts that affect regional aggregate demand: the Keynesian and economic base theories. The first model for students of economics summarizes the essence of economic growth theory. Policies that merely create jobs by increasing demand move the economy from Point D toward some point nearer to the production possibilities curve. Economic growth comes about either by increasing the quality or quantity of resources or by technology and innovation. Economic base theory assumes that an increase in exports will stimulate not only employment and income in basic industries but also the demand for nonbasic goods and services. The chapter identifies the basic industries by estimating location quotients. It investigates the input-output framework to determine exactly how the increased demand for one industry affects many more industries. The chapter concludes by learning how to decompose a region's growth in employment, or lack thereof.