A city is formed at a location where there a natural resource is abundant and plentiful. The human population at this location begins to harvest this natural resource and put it to use. Eg: Venice and the salt flats.
This city, or human settlement really, comes into contact with another human settlement. These two groups of humans trade their differing, but equally useful, resources. For the sake of example, let's say that our imaginary city Veni (which has salt) trades with an imaginary city called Roma (that has cows). Now Veni has some cows and Roma has some salt.
One woman in Veni begins using the salt that is at her disposal to salt the beef that she now has access to. Veni has now created a new product or resource. This salted beef is dried and she begins selling it locally, at the market in Veni. Soon, other people in Veni are making salted beef. Salted beef becomes a staple in every Veniese's diet. The Veni traders that source cows from Roma begin to bring salted beef along with them on their trade junkets. The traders trade their salted beef back to the citizens of Roma. Salted beef, which was once a local product of Veni, has now become an export. Veni now has through the discovery of a new invention and happenstance increased their total trade to 2 exports: salt and salted beef.
In order for Roma to afford salted beef, they are now paying more cows to Veni. With the creation of a new product, Veni has increased the total value of imports that is available to the settlement as a whole. This process explains how new exports are created (or in the case of Roma, new imports).
Now that Veni has more cows, they are able to produce twice the amount of salted beef. They begin to trade their salted beef with a neighboring city, Dalma, that has its own salt production but no access to cows. Veni begins to import woven baskets that Dalma has created, trading salted beef for the baskets. Over time, Veni's crafts people learn how to create bowls out of weaving, gradually replacing their reliance on bowls from Dalma. The salted beef that they had to trade with Dalma now goes toward buying Dalmatian dogs, as well as reeds to make the baskets. Veni, by creating new local jobs in the basket making trade, has replaced the import of woven baskets with locally produced baskets. This is called "import replacement". Thru import replacement, that is replacing imported woven baskets with locally produced baskets, Veni has expanded their local economy and increased the number of goods that they have available to trade with other city markets. Additionally, now Veni has yet another locally produced good that they can trade with other markets. Their total number of potential exports has grown to 3: woven baskets, salted beef, and salt.
It occurs to me, walking thru this very basic scenario of the development of a local economy, that it may not be entirely possible for city such as Veni to produce everything that it trades for. For example, let's say that another of Veni's neighbors is Lapis. Lapis' natural resource is beautiful blue stones that are used in decorative jewelry, religious practices and medicinal cures. Veni trades baskets and salted beef for these stones. No amount of internal development, however, will allow Veni to create these beautiful blue stones for itself. Veni may produce master craftspeople that are adept at fashioning imported stones into beautiful jewelry. Or they may discover a new medicinal use for the stones. But at its core, Lapis will always be relied upon as a source for the raw material that is the blue stones.
Or at least, this used to be the case. Scientists produced the first synthetic diamond in the 1950's. Now, provided that a city has access to the scientific know how and the raw materials that are necessary, any city or location can produce diamonds for themselves. Ubiquity of the stone should drive down the price, and make cities that used to rely on the value of these goods as a driver for their own imported goods down. Imagine if Veni was suddenly able to produce blue stones for themselves, or they discovered a source within the boundary of their own city. Suddenly, Veni no longer needs to trade away salted beef and baskets for stones -- they are readily available for the local market.
There is something here tho, that differentiates the supply and trade based on raw resources and trade based on goods that are created from the combination of a variety of raw goods. I think it's the reproducibility of that good in other places. Returning to the first example of trade between Veni and Roma, the simple case of beef and salt creating salted beef. In this example, both Veni and Roma have the basic resources necessary for both to survive available to them. Although Veni initially created salted beef, there is nothing stopping Roma from developing their own salted beef industry locally, other than perhaps extenuating circumstances of human politics and work ethics.
Let's investigate some reasons why Roma would not develop their own salted beef production. Perhaps Roma has no citizens that have the free time to put in the work to produce salted beef. Maybe Roma's population to too small. Perhaps cattle raising is such a labor intensive production process that there is no spare time left over for Romans to produce salted beef. Maybe the price of salt is prohibitively high, that is that the amount of beef Roma would have to pay to buy enough salt to produce salted beef is higher than the amount of beef it takes for Roma to buy already salted beef from Veni. Why might this be? Perhaps Veni has more people with idle time than Roma, as in the salt trade requires less time than the beef trade does.
Perhaps Roma is a very caste or guild based society and the creation of salted beef does not fit into the existing social structure that Roma has developed. Perhaps in Roma the social hierarchy is established in such a way that the citizens making decisions about production and economy are different than the ones that do the work, such to the extent that the development of new types of work go unfunded and uninvestigated because it is not something that the 'deciders' would consider possible for the 'doers'. (A concrete example of this would be an economy based on slave labor).
Note: this exercise is based on the works of Jane Jacobs, particularly her books the Economy of City, Cities and the Wealth of Nations, and Systems of Nature.
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