Location quotient and trade

Abstract

Economic base analysis suggests that export expansion should be the primary engine of regional economic growth and the most commonly employed approach to identifying specialization is the location quotient (LQ). Similarly, the law of comparative advantage represents a conceptual framework for determining the type of trade. However, several assumptions of the LQ limit both its general applicability and usefulness. This study recommends that comparative advantage can provide another channel to re-examine the LQ from the viewpoints of both interregional and international trade, where the former can correct the LQ from dependence problems of the location theory and the latter inserts international trade into the LQ to show another vital source of exports, especially for a small open economy and increasing globalization today. Furthermore, the optimal LQ is obtained by integration of the above two new revisions to respond to all types of trade. Finally, the evidence finds that differences in base employment between traditional and these new LQ indices are substantial and hence revised LQ should be considered profoundly.