From Neighborhoods to Nations: The Economics of Social Interactions

By Yannis M. Ioannides | Go to book overview

CHAPTER 7
Specialization, Intercity Trade, and
Urban Structure

7.1 INTRODUCTION

Cities are high concentrations of population and thus of economic activity that punctuate the economic and geographic landscape. An uneven concentration of economic activity has been around for a long time, but the emergence of rapid urbanization signaled the beginning of economic development (Bairoch 1988). While city-rural trade has been important for urban development, De Vries (1984) and others argue that the growth of cities was due to technological advances in agriculture and transportation. The economic development of many European economies also depends on international trade, not just on cities trading with their hinterlands. Cities have risen and fallen with the military fortunes of city-states, territorial empires, and nation-states (Kim 2008).1 An understanding of urban development requires assessing together such complex sets of forces.

The modern literature on urban structure and growth seeks to model the economic complexity of cities as entities comprising interdependent economic activities of production, exchange, and consumption. These activities choose to locate close to one another because they benefit from doing so. Social interactions are central to the functioning of the urban economy. Economists studying market economies assume that individuals choose their locations within cities so as to maximize utility by trading off the cost of traveling to jobs, shopping, entertainment, and social interactions. They also assume that individuals choose their locations among cities in order to improve their welfare. At equilibrium in market economies with freedom of movement, otherwise identical individuals should be indifferent as to where to live. This implies conditions that have important and testable consequences for resource allocation.

Firms similarly choose their locations, taking into consideration access to markets for their inputs, that is, access to workers with particular skills, costs of goods including shipping, and access to markets for their own outputs. Firms also benefit from proximity to other activities that are conducive to productivity improvements, that is, social interactions, but are not necessarily

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