That is exactly the reason why I linked to it, it's a great model!
Thank you for that clarification on tiles and RAM constraints, I've been confused about that. Regardless of what we should dream of, the game needs to be playable. It seems then that point 2 is the valid one: groups of inhabited (only?) tiles will combine into a single economic unit, a province, in which production, consumption, and trade, is summed up and managed, while outside trade will be handled by the province as a whole.
The question remains though: how will the size and borders of these economic units be determined? Natural borders, like seas, rivers, mountain ranges and the likes, seems easy enough, but apart from that? Will it be travel distance, like the 100 départements of France? Cultural preference? Maybe economic needs, so that each province tries to include certain basic resources to be somewhat self-efficient? Or rather the opposite, so that they tend to specialise, "the province of the verdant fields", "the province of the deep woods", "the province of the great mines"?
If it is simply geography that defines the province, then it makes sense that it would be quite permanent. If on the other hand it is economy and culture, or even administration and other factors, certain events might change the provinces over time, behooving a more dynamic system. For example, to this day, Sweden's capital of Stockholm is divided in the middle by the prehistoric traditional provinces of Södermanland (south) and Uppland (north). But since the 17th century, there has a been an independent Stockholm county, and the two former provinces, now counties, have "lost" their common border, and been pushed south and north.