Running header: Interrelationship between Transportation and Economic Development

Caribbean Maritime Institute

Kingston, Jamaica

Research Essay

Research Question: What are the Roles and Importance of Transportation in an Economy?

Report Submitted in Partial fulfillment of the Requirements of the Course

Modal and Intermodal Transport

ML 302.6

Presented to:

Nicholas Asemota

Presented by:

Samantha Masters 20131670

March 24, 2016

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Interrelationship between Transportation and Economic Development

Table of Contents

Title Page

1. Table of Contents …………………………………………………………………i

2. Abstract ……………………………………………………………………….…...ii

3. Introduction …………………………………………………………………….…2

4. Modes of Transport …………………………………………………………….…..3

5. Roles of Transport in Relation to an Economy …………………….……...…….....5

6. Importance of Transport in Relation to an Economy…………………………….....7

7. Relationship between Unitization, Trade, Transport and Economic Development...9

8. Relationship between Transport Networks and Logistics Networks……………….9

9. Conclusion ……………………………………………………................................12

10. References…………………………………………………………………………..13
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Interrelationship between Transportation and Economic Development

Abstract

Transport systems are a fundamental component of societies since they support complex

economic and social interactions. In this research essay there will be a thorough examination of

the roles and importance of transportation in relation to an economy.

Interrelationship between Transportation and Economic Development 2

3. Introduction

Transport systems are closely related to socio-economic changes. The mobility of people

and freight and levels of accessibility are at the core of this relationship. Economic opportunities

are likely to arise where transportation infrastructures are able to answer mobility needs and

insure access to markets and resources. (Rodrigue et al, 2016).

Transport is a service that results in a change in the location of goods and people.

Transport may thus be defined as an enabling technology, allowing the spatial re-organization of

goods and people to achieve specific objectives. (Caribbean Maritime Institute, 2000).

Transportation is the movement of goods and persons from place to place and the various means

by which such movement is accomplished. (Encyclopedia Britannica, 2016).

The unique purpose of transportation is to overcome space, which is shaped by a variety

of human and physical constraints such as distance, time, administrative divisions and

topography. (Rodrigue, 2013).

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4. Modes of Transport

Transportation modes are an essential component of transport systems since they are the

means by which mobility is supported. There are a wide range of modes that may be grouped

into three broad categories based on the medium they exploit: land, water and air. (Rodrigue et

al, 2013). Each mode has its own requirements and features, and is adapted to serve the specific

demands of freight and passenger traffic. This gives rise to marked differences in the ways the

modes are deployed and utilized in different parts of the world. More recently, there is a trend

towards integrating the modes through intermodality and linking the modes ever more closely

into production and distribution activities. (Rodrigue et al, 2013). The modes of transportation

are as follows:

Road: Road infrastructures are large consumers of space with the lowest level of physical

constraints among transportation modes. However, physiographical constraints are significant in

road construction with substantial additional costs to overcome features such as rivers or rugged

terrain. Historically road transportation was developed to support non-motorized forms of

transportation. (Glossary of Statistical Terms, 2002);

Rail: Railways are composed of a traced path on which wheeled vehicles are bound. They

have an average level of physical constraints linked to the types of locomotives and a low

gradient is required, particularly for freight. Heavy industries are traditionally linked with rail

transport systems, although containerization has improved the flexibility of rail transportation by

linking it with road and maritime modes. (Glossary of Statistical Terms, 2002);
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Pipelines: Pipeline routes are practically unlimited as they can be laid on land or under

water. Physical constraints are low and include the landscape and pergelisol in arctic or subarctic

environments. Pipeline construction costs vary according to the diameter and increase

proportionally with the distance and with the viscosity of fluids (from gas, low viscosity, to oil,

high viscosity). (Rodrigue et al, 2013);

Maritime Transportation: Because of the physical properties of water conferring

buoyancy and limited friction, maritime transportation is the most effective mode to move large

quantities of cargo over long distances. Main maritime routes are composed of oceans, coasts,

seas, lakes, rivers and channels. Maritime transportation has high terminal costs, since port

infrastructures are among the most expensive to build, maintain and improve. High inventory

costs also characterize maritime transportation. More than any other mode, maritime

transportation is linked to heavy industries, such as steel and petrochemical facilities adjacent to

port sites. (Glossary of Statistical Terms, 2003);

Air Transport: Air routes are practically unlimited, but they are denser over the North Atlantic,

inside North America and Europe and over the North Pacific. Air transport constraints are

multidimensional and include the site (a commercial plane needs about 3,300 meters of runway

for landing and take off), the climate, fog and aerial currents. Air transportation has been

accommodating growing quantities of high value freight and is playing a growing role in global

logistics. (Rodrigue et al, 2013);

Intermodal Transport: Concerns a variety of modes used in combination so that the

respective advantages of each mode are better exploited. (Rodrigue et al, 2013).
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5. Roles of Transport in Relation to an Economy

Efficient transport is a critical component of economic development, globally and

nationally. Transport availability affects global development patterns and can be a boost or a

barrier to economic growth within individual nations. (PPIAF, 2016). Transportation investments

link factors of production together in a web of relationships between producers and consumers

to:

Create geographical comparative advantage: The theory of comparative advantage, in

trade, states that if countries specialize in producing goods where they have a lower opportunity

cost, then there will be an increase in economic welfare. (Pettinger, 2012). The evolution of

transport systems has impacted (regional economies in terms of their level of specialization.

More connected regions tend to become specialized while less connected regions tend to have a

lesser degree of specialization. (Gauthier, 1996). Countries that are closely linked are able to

specialize in industries, as they possess efficient transports systems which allows for ease of

trade of commodities in the various industries they specialize. In a situation of self-reliance there

is no efficient transport link between two regions; goods cannot be transferred in a cost effective

manner. They are isolated from one another and must, therefore, satisfy their own needs.

(Gauthier, 1996);

Create economies of scale and scope: Economies of scale is the cost advantage that arises

with increased output of a product. (Investopedia, 2016). In relation to transportation, economies

of scale refers to a long run average cost curve which slopes down as the size of the transport

firm increases. (Nijkamp, 1979). The presence of economies of scale means that as the size of

the transport firm increases, the average or unit cost of transportation decreases. Economy of
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Scope is a proportionate saving, gained by producing two or more distinct goods, when the cost

of doing so is less than that of producing each separately. (Investopedia, 2016). The transport

firm produces services which are conceptually deemed as products. For economies of scope, in

relation to transportation, the firm typically produces a large number of products from a common

production facility. (Nijkamp, 1979). In addition, the products of most transportation carriers are

differentiated by time, space and quality. Because a number of distinct non-homogeneous

outputs are being produced from a common production facility, joint and common costs arise.

The presence of joint and common costs gives rise to economies of scope. (Nijkamp, 1979).

Mitigate spatial inequity: For goods, the underlying motive for transport is that the price

of goods varies with their location. A profit can be made by transporting them from where

supply is plentiful and demand is low, to places where demand is high and supply is limited.

(Caribbean Maritime Institute, 2000). This is, therefore, what is meant by transportation

overcoming spatial inequities. The lower the cost of the transportation, the smaller are the

reaction-dependent price differences, that make transport worthwhile, and efficient in the

division of production. If transport were absolutely free and instantaneous, then there would be

no spatial inequity. (Caribbean Maritime Institute, 2000).

Overcome frictional distance and cost: The use of the word friction, in this context, has to

do with factors that resist movement, and excludes unavoidable driving-force factors. These

resisting factors include: incompatible equipment that causes delays at transfer points; poor

packaging systems and techniques, resulting in damaged goods; poor tracking technologies and

methods which make it hard to locate goods in transit; inefficient terminal systems and structures

which slow turnaround of vehicles and vessels. (Caribbean Maritime Institute, 2000). Frictional
Interrelationship between Transportation and Economic Development
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costs refer to the additional cost resulting from avoidable cargo transport inefficiencies and

bottlenecks. (Rodrigue, 2013).

6. Importance of Transport in Relation to an Economy

Because of its intensive use of infrastructures, the transport sector is an important

component of the economy and a common tool used for development. This is even more so in a

global economy where economic opportunities are generally related to the mobility of people,

goods and information. (CSCMP, 2014). There is a relationship between the quantity and quality

of transport infrastructure and the level of economic development is apparent. High density

transport infrastructure and highly connected networks are commonly associated with high levels

of development. When transport systems are efficient, they provide economic and social

opportunities and benefits that result in positive multipliers effects such as better accessibility to

markets, employment and additional investments. (Rodrigue et al, 2016). When transport

systems are deficient in terms of capacity or reliability, they can have an economic cost such as

reduced or missed opportunities and lower quality of life. (Rodrigue et al, 2016).

The economic importance of the transportation industry can thus be assessed from a

macroeconomic and microeconomic perspective:

At the macroeconomic level (the importance of transportation for a whole economy),

transportation and the mobility it confers are linked to a level of output, employment and income

within a national economy. In many developed countries, transportation accounts between 6%

and 12% of the GDP. (Rodrigue et al, 2016).

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At the microeconomic level (the importance of transportation for specific parts of the economy)

transportation is linked to producer, consumer and production costs. The importance of specific

transport activities and infrastructure can thus be assessed for each sector of the economy.

Usually, higher income levels are associated with a greater share of transportation in

consumption expenses. Transportation accounts on average between 10% and 15% of household

expenditures, while it accounts around 4% of the costs of each unit of output in manufacturing,

but this figure varies greatly according to sub sectors. (Rodrigue et al, 2016).

The economic impacts of transportation can be direct, indirect and induced:

Direct impacts: The outcome of improved capacity and efficiency where transport provides

employment, added value, larger markets as well as tme and costs improvements. The overall

demand of an economy is increasing. (Rodrigue et al, 2016).

Indirect impacts: The outcome of improved accessibility and economies of scale. Indirect

value‐added and jobs are the result of local purchases by companies directly dependent upon

transport activity. Transport activities are responsible for a wide range of indirect value‐added

and employment effects, through the linkages of transport with other economic sectors (e.g.

office supply firms, equipment and parts suppliers, maintenance and repair services, insurance

companies, consulting and other business services). (Rodrigue et al, 2016).

Induced impacts: The outcome of the economic multiplier effects where the price of

commodities, goods or services drops and/or their variety increases. For instance, the steel

industry requires cost efficient import of iron ore and coal for the blast furnaces and export

activities for finished products such as steel booms and coils. Manufacturers and retail outlets
Interrelationship between Transportation and Economic Development
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and distribution centers handling imported containerized cargo rely on efficient transport and

seaport operations. (Rodrigue et al, 2016).

7. Relationship between Unitization, Trade, Transport and Economic Development

Unitization, which is the combination of homogeneous cargo into large units, provides

for greater efficiencies in the transportation of cargo, which, in turn facilitates efficiency in trade,

which will then promote economic growth. (Caribbean Maritime Institute, 2000).

8. Relationship between transport networks and Logistics networks

A network is a set of nodes, pairs of which are connected by links. The links may carry

whatever is flowing in the network in one direction only, or in both directions, depending on the

nature of the network. (Caribbean Maritime Institute, 2000).

Sources, sinks, and facilities are types of node in a network. A source node is simply one

where there is more of whatever is flowing in the network leaving the node than entering it. In

logistics management, source nodes are often called supply markets. A sink node is

correspondingly one where there is more of whatever is flowing in the network entering the node

than leaving it. (Caribbean Maritime Institute, 2000).In logistics management, sink nodes are

often called demand markets. A facility is a node where there is just as much leaving the node as

entering it. In logistics management, a factory is a production facility because there is a constant

inward flow of supplies matched by a constant outward flow of supplies (called products).

(Caribbean Maritime Institute, 2000).

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In logistics networks, the nodes represent the integration of different types of businesses

eg. communication, transport, distribution etc. and the links represent both the physical

movement of goods and supplies and all of the necessary accompanying communication,

transportation, commercial arrangements, recycling paths, etc. (Tseng, 2005).

The nodes in a transport network are sources (pick-up points), sinks (delivery points),

transshipment points, and intermodal facilities. The links are physical routes. Transport networks

are obviously related to physical supply and distribution networks, but the emphasis in a

transport network is on the perspective of the provider, rather than the user of transport services.

(Tseng, 2005).

Transportation plays a connective role among the several steps that result in the

conversion of resources into useful goods in the name of the ultimate consumer. It is the

planning of all these functions and sub-functions into a system for the movement of goods in

order to minimize cost maximize service to the customers that constitutes the concept of business

logistics. (Tseng, 2005).

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8. Conclusion

Finally, Transportation is the movement of goods and persons from place to place and the

various means by which such movement is accomplished. The purpose of transportation is to

overcome space, which is shaped by a variety of human and physical constraints such as

distance, time, administrative divisions and topography.

The roles of transport in relation to an economy are: Creating geographical comparative

advantage which facilitates the ease of trade via well developed transportation infrastructure;

Creating economies of scale and scope which facilitate economical decisions concerning

transport modes; Mitigating spatial equity which facilitates the efficient division of production;

and Overcoming frictional distance and costs which provides for efficiency in the transportation

process of passengers and cargo.

Transportation is important to an economy because it is an important tool used for

development, as economic opportunities are generally related to the mobility of people, goods

and information.
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References

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CSCMP, Goldsby, T, Iyengar, D, Rao, S. (2014). The Critical Role of Transportation in

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http://www.ftpress.com/articles/article.aspx?p=2171313.

Glossary of Statistical Terms, (2002). Road transport. Retrieved from

https://stats.oecd.org/glossary/detail.asp?ID=4080

Glossary of Statistical Terms, (2003). Seatransport. Retrieved from

https://stats.oecd.org/glossary/detail.asp?ID=4277

Glossary of Statistical Terms, (2002). Rail transport. Retrieved from

https://stats.oecd.org/glossary/detail.asp?ID=3975

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http://www.investopedia.com/terms/e/economiesofscope.asp

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PPIAF. (2016). The Role of Transport in Economic Development. Retrieved from

http://marketinglord.blogspot.com/2012/06/roleandimportanceoftransportation.html

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