8. A Simple Model of an Urban Economy with Multiple Industries

What can models that envisage the city as a producer of exports tell us about the organization of cities in equilibrium when more than one industry is present? In this chapter, I present a model that contains four industries (two that manufacture for export, one that produces an intermediate good, and one that retails to residents). In Industry 1 and Industry 2, the export price is given. In Industry 3 and Industry 4, the free entry of firms is seen to drive the price of a unit of output down to marginal cost. Industry 4 imports a good then sold to local consumers at a mark-up that means no excess profit. In this chapter, labor is the only factor of production and each industry has constant returns to scale. The models assume an open economy; the supply of labor locally is perfectly elastic. Profits and imports are treated as leakages from the city’s economy. In this chapter, no land is consumed: either to house workers or to accommodate production. In this chapter, the wages of all workers in the city are entirely expended on purchases from the retail sector (Industry 4). Export prices must be sufficiently high for firms to find it profitable to produce for export and therefore employ workers. If export demand were to increase, the aggregate quantity produced by Industry 2 or Industry 1 would increase as needed without affecting unit cost or unit profit. Industry 3 and Industry 4 would grow in step with the export industries. With four industries, the model in this chapter tells us something about how the city is organized sectorally: especially between production (Industries 1, 2, and 3) and retailing (Industry 4).