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Tradable Economy

Description: 

Regional economic theory states that the economy of any local area (for example, a state) is driven by economic activities that import https://www.arizonaindicators.org/files/economy/money into the local area through the sales of goods and services to customers who do not live—or in the case of businesses, do not have a physical presence—in the local area. The portion of the economy that sells to customers outside the local area is called the “tradable” economy, or alternatively “basic” or “export” economic activity. Customers of the tradable economy may be located elsewhere in the United States or in another country. Such export activities differ from population-driven (not tradable, nonbasic, nonexport) activities, which sell to and support the local population.

The geographic concentration of economic activities within the United States is used to identify activities that appear to be traded within the United States. For example, significant mining operations in the United States are limited to relatively few locations. This high geographic concentration indicates that a very high proportion of mining is tradable. In contrast, health care exists across the nation in relatively equal shares of the total economy or local population, indicating that hardly any of this activity is tradable.

Economic activity can be measured using a multitude of indicators. The most common is employment, but this is an imperfect measure of economic activity because of variations in the number of hours worked and in the hourly wage. That is, jobs are unequal in their dollar impact on the economy. Thus, when dollar measures of economic activity are available, such as earnings or gross domestic product (GDP), they are preferable to employment for most economic analyses, including tradability. Tradable shares are displayed on Arizona Indicators for each of these three measures. Consistent industrial data go back to 1990 for employment and earnings, but only back to 1997 for GDP.

Data Source: 

The tradable share of economic activity by sector was calculated by J. Bradford Jensen and Lori G. Kletzer, “Tradable Services: Understanding the Scope and Impact of Services Outsourcing,” Peterson Institute for International Studies (September 2005), http://www.iie.com/publications/interstitial.cfm?ResearchID=545.

Annual data on employment, earnings and gross domestic product are from the U.S. Department of Commerce, Bureau of Economic Analysis http://www.bea.gov/regional/index.htm.

Data Quality Comments: 

In order to determine the share of the local area economy that is engaged in tradable activities, a determination of the tradable share of economic activity in every industry ideally would be made. However, all economic data are subject to the federal government’s disclosure restrictions, which are in place to prevent data on a particular company from being released or otherwise ascertained. These restrictions result in considerable data being withheld from publication for local areas. Thus, it is not possible to estimate the tradable share of activity except at high levels of industrial aggregation (primarily sectors). This leads to imprecision when estimating the overall tradable share of a local economy.

Further, there are various methods to determine the tradable percentage in each sector, but none are precise.

The GDP estimates for the latest year are labeled as “advanced” or “accelerated”—an abbreviated set of mostly preliminary data and a simplified methodology are used to generate these estimates. Even after the estimates are revised, some of the inputs to the calculation of GDP by state are estimated.

Some of the inputs to the calculation of earnings by state are estimated. The annual employment figures are estimates. Though most jobs are counted in the Quarterly Census of Employment and Wages (QCEW), which is released about six months after the end of each quarter, proprietors and some wage and salary workers are not counted in the census. No distinction is made between full-time and part-time employment.

iconShare Of Economic Activity That Is Tradable By Sector

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Visualization Notes:

Estimates of the share of economic activity that is tradable vary by sector from approximately 100 percent in sectors such as agriculture and mining to nearly zero in sectors such as construction, private educational services, and health care. In most sectors, a portion of the economic goods and services is exported out of state while a portion is sold to customers within the state. Overall, 39.2 percent of the U.S. economy is tradable based on the methodology and employment data used.

iconTradable Share of the Arizona Economy

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Visualization Notes:

The percentage of the Arizona economy in 2010 that is tradable varies widely by economic measure. Tradability is much higher based on gross domestic product (50 percent) than on earnings (41 percent), with the share lowest based on employment (39 percent).

The tradable share of the economy is not constant over time. Some sectors are more cyclical than others, introducing an up-and-down pattern to the tradable percentage. In addition, the long-term growth in some sectors is greater than in others, causing the tradable share to follow a long-term trend. All three economic measures display cyclicality in the tradable share. In addition, the tradable percentage has trended down since the late 1990s in Arizona. The lowest values were reached in 2006 or 2007 on each measure. Some recovery occurred during the 2008-09 recession, when some nontradable activities such as construction were especially affected by the economic downturn.

iconPercentage Point Difference In Tradable Share, Arizona Less United States

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Visualization Notes:

Based on all three measures—employment, earnings, and gross product—the tradable share in Arizona is less than the U.S. average. The differential in Arizona’s tradable share from the national average has narrowed over the last two decades based on employment while doubling in size in the last decade based on GDP.

Data Source

The tradable share of economic activity by sector was calculated by J. Bradford Jensen and Lori G. Kletzer, “Tradable Services: Understanding the Scope and Impact of Services Outsourcing,” Peterson Institute for International Studies (September 2005), http://www.iie.com/publications/interstitial.cfm?ResearchID=545.

Annual data on employment, earnings and gross domestic product are from the U.S. Department of Commerce, Bureau of Economic Analysis http://www.bea.gov/regional/index.htm.