The Impact of Transportation on the Economy

Transportation and economic systems are closely intertwined. Since transmission networks connect businesses, resources, and people around the world, their development has a significant impact on the economy. However, the connection between transportation investment and economic development is far deeper than it would seem. There is a clear need for further research that can assist in determining reasons why exactly transportation is a vital part of a market economy. Moreover, there are also several ways in which this sector can influence the financial activity of businesses, which need to be studied as well.

With this knowledge, economists and policymakers can implement different strategies that can help to ensure stabilized economic growth. This paper aims to investigate whether the impact of transportation infrastructure on the economy is significant enough to make positive changes. Several problems will be addressed further in this research; for example, the question of whether improvements in this section can guarantee economic growth. To address this concern, comprehensive literature research on this subject will be conducted. The information will be extracted from secondary sources, such as relevant scholarly articles and books.

First of all, it is important to identify the principal role that transportation networks play in the economy, although it may seem obvious. After all, their basic function is to move people and goods from one place to another. However, their purpose goes beyond that task as transportation also provides access to different locations not only for individuals to travel but for companies to expand their business as well. Moreover, Litman (2017) argues that “transportation improvements are often advocated for economic development, and there is often debate over which transport policies best support economic objectives” (p. 5). Therefore, transportation plays a key role as one of its primary goals is to offer opportunities to obtain desired services and resources.

The issues of using infrastructures have become even more important as the economy became globalized. Even though international trade existed since time immemorial, nowadays, globalization increased economic opportunities. The mobility of people and goods is easier now, and transport has also developed. Over the last years, there has been unprecedented growth in trade amongst countries, and it does not seem that this trend will ever slow down. The increases in trade have put tremendous pressure on the transportation industry.

Nevertheless, Rodrigue and Notteboom (n.d.) consider these systems efficient, because “they provide economic and social opportunities and benefits that result in positive multiplier effects such as better accessibility to markets, employment, and additional investments” (para 43).

With the help of transportation, businesses can trade in other cities and countries, increasing not only benefits but competitive pressure as well. Moreover, the customers will be provided with more choices of products to buy from. In other words, since transport systems increase accessibility, the productivity of businesses grows as well. This fact means that in cases where such networks are not effective or reliable, it causes negative consequences, such as decreased or lost market opportunities and a poorer quality of life.

There is evidence that increasing transport system efficiency ensures economic productivity for companies. Litman (2017) states that “if a business has an 8% annual return on investment and transport represents 16% of its costs, a 5% reduction in transport costs increases profits 10%” (p. 7). Moreover, he also notes that with the help of infrastructures, shipping costs are reduced that can lower retail prices. In addition, service quality can also be improved since deliveries become more frequent, which satisfies customers. Thus, transport changes will provide businesses with a variety of incentives to reorganize their manufacturing and distribution processes to get cost benefits that could not otherwise be achieved.

The Ministry of Transport in New Zealand elaborates on the role of transport in the economy. In the summer report “Contribution of transport to economic development”, the government analyzes the infrastructure (New Zealand Ministry of Transport, 2016). According to their findings, “transport operations account for about 5% of New Zealand GDP” (New Zealand Ministry of Transport, 2016, p. 3). Furthermore, it generates benefits not only for New Zealand but for other countries as well. For example, “a 5 percent reduction in travel time for all business travel on the road network in Great Britain could generate around £2.5 billion of cost savings: 0.2 percent of GDP” (New Zealand Ministry of Transport, 2016, p. 14). Thus, it becomes evident that it is an important sector of the country’s economy.

However, it should be noted that in New Zealand or Great Britain, it is not likely that further investment in this industry will cause economic development. This can be explained by the fact that in developed countries, a well-connected effective infrastructure has already been established. Moreover, this is a country with a relatively small territory, where it is easier to build roads and railways. Nevertheless, creating an efficient transportation system can cause positive economic outcomes for developing countries where it is difficult to move from town to town. On the other hand, to guarantee the productiveness of infrastructure, many factors should be taken into account while planning it.

Several researchers conducted studies on what elements contribute to transportation planning. For instance, Litman (2017) determines the number of factors that can affect it. First of all, an input to the economic operation, such as shipping and travel, the delivery should be considered. The reason for this is the fact that such activities directly affect production and distribution costs. Moreover, he also states that the infrastructure affects “productivity, employment and profits of transportation-related industries” (Litman, 2017, p. 5).

Furthermore, he highlights the importance of whether people have available access to schools, works, and shops through transportation. After all, these facilities make them engage in economic operations, whether it would be buying something or working in the business. Cost burdens, as well as “impacts on location and land use development patterns,” should also be taken into account (Litman, 2017, p. 5). Therefore, the researcher identified many factors that have an impact on transportation planning decisions, which should be recognized by policymakers and those who build and evaluate infrastructures.

Other researchers also note what impact transport on the financial state of some countries. For example, Ghani (2015) states that in India, this industry plays a significant role since the government has control over all the land, while also having all property and building rights. It means that businesses have to rent land from the government, which affects the distribution of companies and plants across the country.

According to Ghani (2015), “given India’s distorted land markets, the heightened connectivity brought about by the transportation upgrades was particularly important for efficient sorting of the industry across spatial locations” (para 5). This fact also proves the point that was mentioned above. The effective transport system can surely benefit the economy of developed countries since it provides access to goods even to regions that are difficult to reach.

It seems like transportation issues are vital for the Indian economy because Donaldson (2018) also researched whether railroad networks provide any positive results and increase income or welfare. According to him, “when the railroad network was extended to the average district, real agricultural income in that district rose by approximately 16 percent” (Donaldson, 2018, p. 931).

However, he also notes that this result does not provide any information on what mechanisms work behind such a result. Moreover, the development of railroads increased income by reducing the cost of trading, but it does not solve other economic problems that the country faces. Therefore, aside from creating more transportation means, further research is needed to develop strategies to improve the financial satiation in India.

While the relationship between economic growth and investment in the development of transport systems is apparent, there is no clear evidence that one is a cause of the other. Such an issue is raised in the research by Mohmand, Wang, and Saeed (2017), where they investigate the impact of transport infrastructure in Pakistan. According to them, at the national level, “GDP is the cause of transportation infrastructure’s development, which means that GDP is indeed a significant cause of development of Pakistan’s transportation infrastructure” (p. 68).

However, even though an improvement of the system can bring positive outcomes, the advances only in the transportation infrastructure are unlikely to transform underdeveloped regions of Pakistan significantly. Therefore, it becomes clear that aside from these changes, more efforts in other economic areas should be made. Such a conclusion means that although transportation can be effective in changing the economy for the better, it is not the only tool for improvement.

The other interesting study by Hinners, Nelson, & Buchert (2018) explores employment trends in connection with streetcars in urbanized areas. After all, the presence of good labor opportunities means that the country’s economy is probably in good condition. To achieve this goal, the researchers compared employment rates three years before the streetcar construction and after the establishment of the three streetcar station areas. They conducted a study in different areas and took into account the economic performances of the analyzed regions. According to the results, the economic system of Portland has demonstrated development consistency, as well as the situation in New Orleans. Nevertheless, the outcomes in Salt Lake City and Seattle were different, as the construction of cars did not help to increase economic growth. Such results imply the same idea that was earlier expressed by Mohmad, Wang, and Saeed (2017).

In conclusion, it would appear that even though investment in the transportation industry may support economic development, it cannot play the role of the main driving force behind economic development. Nevertheless, the connection between two important areas of human life should not be diminished as transportation infrastructure is one of the key factors that enable advances in trade. In countries where an efficient system was already established, it would be more effective to look for other methods to ensure improvement. However, transportation should be developed in areas where people do not yet have access to jobs and goods.

References

  1. Donaldson, D. (2018). Railroads of the Raj: Estimating the impact of transportation infrastructure. American Economic Review, 108(4-5), 899-934.
  2. Ghani, E. (2015) How to Understand the Economic Impact of Transport Networks. Web.
  3. Hinners, S. J., Nelson, A. C., & Buchert, M. (2018). Streetcars and Economic Development: Do Streetcars Stimulate Employment Growth? Transportation Research Record, 2672(8), 339-350.
  4. Litman, T. (2017). Evaluating Transportation Economic Development Impacts. Web.
  5. Mohmand, Y. T., Wang, A., & Saeed, A. (2017). The Impact of Transportation Infrastructure on Economic Growth: Empirical Evidence from Pakistan. Transportation Letters, 9(2), 63-69.
  6. New Zealand Ministry of Transport. (2016). Contribution of Transport to Economic Development. New Zealand Government, 1-19.
  7. Rodrigue, J. P., Notteboom, T. (n.d.) Transportation and Economic Development. Web.

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