This blog is the twelfth in our series on the key concepts to consider when thinking about local economic growth policies. We’re using the series to test-drive a way of explaining concepts in economic growth that we hope to use in new training and resources. We are keen to hear from readers, particularly those in local and central government, about whether they find these useful and accessible, and if there are other topics you would like to see us cover.
What are tradable and non-tradables?
Tradable goods and services can be sold and consumed outside of the region they are produced. In contrast, non-tradable goods and services can only be bought and consumed where they are produced. Cars and computer software are tradable. A meal at a restaurant is not.
In practice, things tend to be more or less tradable, and so these binary classifications are simplifications. For example, a restaurant meal becomes tradable if a person is willing to travel to consume it. And what is tradable or non-tradable can change over time with technological progress. Vegetables used to be primarily consumed where they were produced. Refrigeration and faster transportation changed that. Similarly, yoga classes used to only happen in person, but YouTube and other video sharing platforms have created opportunities for them to be tradable.
Why do we need to think about tradable and non-tradables?
Put simply, policymakers need to think about the tradable sector because it is key to local prosperity.
Spatial differences in productivity tend to be driven by the tradable sector. In contrast, the non-tradable sector tends to be composed of services for which there are little differences in productivity – cutting someone’s hair in London takes about the same amount of time as it would do in Doncaster.
Similarly, tradeable sectors tend to drive productivity growth. Cutting someone’s hair takes as long as it did fifty years ago. In comparison, traded goods and services tend to be in sectors that become more efficient with technological change. Robots make factories more efficient. Machine learning improves how people search for information online. What’s more, businesses are incentivised to adopt these new technologies as they face competition from anywhere in the world. Cable television needs to adapt to the rise of streaming platforms or risk losing their customers.
The traded sector benefits local economies in other ways. The traded sector generates income which can be spent locally. This results in what economists call the multiplier effect. Put simply, the multiplier effect is the number of additional jobs one additional job creates. For example, when a new factory opens and creates a thousand new jobs, other sectors will benefit and also expand. Think of the coffee shops, restaurants, and cinemas that cater to those new manufacturing jobs. Purchases by firms have a similar effect on local firms in their supply chain. Employment in the non-traded sector therefore increases when the traded sector expands. Non-tradable sectors also have a multiplier effect, but studies show that it’s much lower.
Tradable sectors also serve a market that reaches beyond the local economy. This means that they are much less likely to be in direct competition with other local businesses, reducing the risk of displacement. If a local authority offers marketing advice to some hair salons to help them attract more customers, that growth in business is likely due to taking customers from other local hair salons. Whereas, if a local authority offers marketing advice to a manufacturer, additional customers and turnover most likely won’t come at the expense of another local business.
What to consider when thinking about tradable and non-tradables?
The type of tradable sector will affect the impact it has on the non-tradable sector. Manufacturing has a lower multiplier than high tech. This is because the higher the wage in the traded sector, the more its workers are willing to spend on local goods and services.
The multiplier effect implies that when the tradable sector shrinks, it also brings the non-tradable sector down with it. The inability to trade means that the non-tradable sector has no other option but close when its clients lose their jobs. If a factory shuts, local hairdressers cannot compensate this loss of clients by selling their services to clients in other regions. This dependence between sectors means that special attention should be given to the health of the tradable sector in local economies. Policymakers should work to diversify industries within the tradable sector to avoid being dependent on one major employer.