International Cities as the Economic Unit of Account: Theory and Measurement

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The objective of the proposed research is to facilitate the evolution of macroeconomics from reliance on the National Income and Product Accounts (NIPA) toward an internationally integrated system of City Income and Product Accounts (CIPA). Much is gained by this transition in terms of the scope of economic research and policy analysis while little is lost. That little is lost is evident in the fact that world urbanization increased from 13% in 1900 to 49% in 2005 and is predicted to rise to 60% by 2030 (2006 UN World Urbanization Prospects report). What is gained is substantial based on preliminary results emerging from a number of sub-fields of economics. International economists using city-level price surveys, including work by the co-PIs and collaborators, find that many facts arising from studies of national price indices fail to emerge when city level data is employed. Price adjustment is much faster than what the national data show. Goods that are less traded have larger and more persistent deviations than goods that are more traded. Market segmentation arising from national borders is less severe when absolute LOP deviations are the metric than when time series volatility of aggregated CPI indices are the metric. Three core themes surface in the context of these facts. First, the service sector looms large, both in the distribution of traded goods to final consumers in retail markets and in local services production (education, medicine, emergency services, utilities and transportation infrastructure). Second, markups of price over marginal cost play a central role in accounting for geographic price dispersion. Third, two thirds of international trade has a single multinational firm at one end of the transaction. While this suggests levels of industry concentration conducive to geographic price discrimination, there is still much to learn about the relationship between the geography of markups and the geographic concentration of product-level production.Intellectual MeritThe intellectual merit of the research is to provide data infrastructure to support Dynamic Stochastic General Equilibrium (DSGE) modeling at the microeconomic level. This allows integrated study of heterogenous economic responses to macroeconomic shocks as well as the spatial scale of microeconomic spillovers. LOP is a compelling reason to study goods markets and cities in a general equilibrium framework. The challenge is to a build model that incorporates LOP deviations in a realistic fashion. Some markets are geographically segmented (medical services, public education), others are globally integrated (agricultural, manufactured goods). The equilibrium of a city depends on the balance of segmentation across the goods, labor and capital markets.Broader ImpactThe broader impact is a novel way of thinking about spatial economic interaction. Shocks and policies need not be defined on the basis of arbitrary political divisions. Cities are microcosms of the world economy that offer insights into the social sciences. Since services are disproportionately publicly provided, cities provide laboratories to study political economy, including issues that span national boundaries. Linking the data and models developed here with Google Earth, students and teachers will be able to explore economic, geographic, cultural and political dimensions of cities in a more integrated and rigorous manner.