INTL 102

Friedrich List

19th century German economist and supporter of infant industry protection. He argued that the ultimate goal was free trade, but that temporary trade protection was necessary to make infant industries be competitive with the major powers. Can be placed in the context of protectionist policies in textile mills in North East United States and Francis Cabot Lowell

Kathe Hollwitz

A German expressionist painter. Käthe Kollwitz captured the horror of World War I. One of her sons was killed in ww1, who made a memorial dedicated to him and those who died during the war. The casualties and costs of war were numbers never seen before. The misery, suffering and poverty that ensued deeply marked this era. Kollwitz's paintings, such as "Widows and Orphans" (1919), are mostly in black, and attempt to portray the tragedy of the world's first world war on all those involved, notably the civilians left behind by their husbands and brothers and sons, as well as their government and economy.

Prime Minister Robert Peel

A conservative, William Peel was part of the British elite who completely disagreed with the the political party supporting the repeal of the corn laws and free trade (Whigs). Despite his background, after the Irish famine, he slowly became convinced that protectionism through the Corn Laws was not in the best interest of the English people (and the world), and outraged by the landowners lack of empathy for the starving and hungry, worked to finally repeal these laws over a three year period. This led to the end of his political career, because he knew he would be deposed as the Conservative leader. Significance: Helped repeal corn laws => globalization (mass migration, capital flows, export/ imports, etc. )(he was not reelected)

World Trade Organization (WTO)

An organization put in place to regulate trade and ensure that every country abides by the principle of free trade so that no country is taken advantage of. WTO is important because prior to this, countries were less open to trade and were unable to reap the benefits of free trade. The organization makes it possible for cooperation between countries and provides dispute settlement mechanisms for trade disputes between nations. It is the most influential inter-governmental body that ensures different nations remain committed to the principles of free trade and cooperation. Helps governments work together toward mutual gain. Facilitates international cooperation thereby enabling societies to capture the welfare gains from trade. The World Trade Organization is the only international institution that oversees the global trade rules between nations.The main function of the organization is to help producers of goods and services, exporters, and importers protect and manage their businesses.

Anti-Corn Law League

Anti-Corn Law League was a powerful lobby advocating free trade and consisted of manufacturers, merchants, bankers, etc... In other words, Britain's abundant factors of production advocating for free trade and the repeal of the protectionist Corn Laws. They recognized the inefficiency of protectionism in light of comparative advantage, and the benefits free trade would bring for the manufacturing industry. Were able to acquire Reform Act of 1832, which reconfigured the House of Commons, giving more seats to large cities, and taking those of the landed elites from the "rotten boroughs" away, reducing their influence, and giving far greater representation to capitalists. They ultimately led to the repeal of the Corn Laws in 1846

Liquidationism

Argued that the economy had to liquidate all bad investments, bad loans, and useless products before recovery could take place. Liquidationists argued that the excesses of the 1920's was the reason for the intense recession. Liquidationism and inaction didn't work because the Depression was a much greater economic crisis than what occurred in a normal business cycle. With the transformation of political economies due to WWI (the consumer durable revolution, rise of labor, rise in vertically integrated corporations) prices and wages did not decline as needed to sustain or restore balance in the economy as they did in the Golden Age.

William Jennings Bryan

Bryan was a staunch anti-gold exchange rate supporter from the United States, and he ran twice (and failed) for President. He led the movement in the U.S. for silver backing of currency. He famously said that "You shall not crucify mankind upon a cross of gold", and that labor shouldn't be forced to face the limitations that the gold standard placed on the government to deal with economic downturns. Significance: Bryan's protectionist views and his anti-gold exchange rate policies exemplifies the Populist beliefs in the United States towards the end of the Golden Age. His views also embody the growing discontent in the united states amongst farmers not related to exports and to industries/ and industrial laborers who did not have a comparative advantage in international trade (i.e. textiles, banks, heavy industry). Bryan challenged the status quo of international finance and he directly attacked the structure of international economic order established by the British.

Convergence (catching up)

Catching-up refers to the idea that poor countries should grow quickly and rich countries should grow slowly. When countries have no impediments to the flow of technology and capital are behind in productivity, they should have higher productivity growth and catch up with rich countries. Globalization should spread technology and capital to poor nations through trade, etc... allowing them the opportunity to improve their productivity and catch up with rich countries. This process of convergence is characteristic of globalization. This leads to a greater equality. Japan, Argentina in a "convergence club"

Specialization and comparative advantage

Comparative advantage is when a country produces a good or service for a lower opportunity cost than another country. Example: if the US can produce 10 cups or 10 plates a day and China can produce 1 cup or 3 plates a day, the US has absolute advantage is both plates and cups. BUT the marginal cost of a cup in the US is 1 plate and the marginal cost of a plate in the US is 1 cup. Meanwhile, the marginal cost of a cup in China is 3 plates and the cost of a plate in China is ⅓ of a cup. Therefore, China has the comparative advantage in plates. Every country gains from specializing in the product they make relatively well, and trading for the product they make relatively less well. All countries have a comparative advantage in something & no country has a comparative advantage in everything. These differences in opportunity cost, according to the Heckscher-Ohlin theorem, come from a nation's relative endowment of resources (factors of production).

Consumer durables revolution

Consumer durables are things like cars and household appliances (washing machines, etc.) that can last for years. New consumer durables were being produced in the interwar period due to changes in the production processes spurred by the second industrial revolution and WW1. World War 1 spurred the development of electric grids, petroleum refining, and new steel alloys. This led to the development of the airplane and automobile industries. Technological advancements allowed for the scale of production to increase (Ford assembly line); the mass production of consumer durables lowered their prices considerably. The increased demand for consumer durables necessitated large-scale operations and the big plants/ firms that accompanied them. Americans and Europeans were able to afford things that were previously too expensive for any middle class family. - SIGNIFICANCE: The consumer durables revolution helped transform the auto industry into the largest industry in every major developed country. This revolution also supported countless other industries which were used as inputs into the production of durables like tin, nickel, steel, etc. Furthermore, this revolution led to the development of multi-plant corporations that effectively vertically integrated (think of GM buying Fisher Body in order to move past the hold up problem). In the United States (and europe), having widespread access to cars provided unprecedented individual mobility.

"Reactionary" crops

Crops that were better off grown by large farmers, particularly plantation workers that focus heavily on labor from slaves and indigenous people to provide the good. The crops include sugar and corn. Crops like sugar and tobacco were considered high value crops and usually grown on plantations. Plantation economies created unequal distribution of income, leading to the introduction of political and legal institutions guaranteeing inequality and in the long-run, became part of the political structural order. This explains the reason why some nations, though they began like the US and Canada with abundant land, diverged from their enriching path, and became a poor nation.

"Progressive" crops

Crops that were better off grown by small individual farmers since there wasn't a mass demand for these goods. There crops include coffee and rice. Crops like corn and wheat were considered low value crops and usually grown on smaller type farms like settlement economies. These economies usually created an equal distribution of wealth, creating nations focused more on political and socioeconomic equality in the long-run, eventually creating public schools open to all children. This explains why such nations were able to catch up and converge with globalized, rich and free trading nations.

Infant-Industry protection

Definition: Can be beneficial in making less competitive industries/ infant industries artificially profitable and competitive. It claims that protection is necessary for small/ new firms due to the "fact" that they have little likelihood of success when having to compete with already established (adult). These infant industries cannot compete with the more efficient and less costly adult industries in a world market. Supporters of the infant- industry argument demand that infant industries be protected through things like import tariffs which would raise the domestic price, hence covering their higher costs. Significance: This argument is commonly used by those supporting protection throughout the world. For example, Japan protected its silk and cotton textile exports with protection through tariffs on imports and subsidizing local production of textiles. This did lead to Japan's quick rise in the international markets/ and military prowess. It puts more money into producers' pockets rather than consumers (causing bitter political conflicts). It also reduces efficiency (or aggregate welfare) because it diverts resources to less productive industries (Frieden pg 66)

Exchange rate electoral cycle

Demonstrates the way in which politicians attempt to maintain a currency artificially appreciated before re-election in order to increase public opinion in their favor. After the elections, currency is devalued, which becomes costly and reduces favorable public opinion, yet regardless of who was put in office, they are able to blame it on their predecessors.

Divergence puzzles

Divergence puzzles consist of exceptions to why some countries did not converge even though they started off with vast amounts of certain land and natural resources. Mostly this refers to colonies such as those located in the Caribbean, Africa, and Central/ South America that have not caught up to the US. Though imperialism played part it is poor institutions (weak property rights, no rule of law, corruption) and differences in endowments/economic structures that led to divergence.

Liberty loans

During the war, European countries borrowed from the US via Liberty Loans to finance their efforts. After the war, the US expected the loans to be returned in full. Unlike other countries, the US economy benefitted from the war and became a leading economic nation. The US refused to forgive or reduce the debts despite its economic prowess over war-torn Europe and this paved the way for the Great Depression and WWII.

Great depression of 1873-1896

During this depression, the economy contracted for 65 months, which was longer than the 1930s Great Depression. The government had to let this depression run its course since it could not use domestic monetary policy due to Gold Standard. Deflation during the depression was followed by inflation after gold discoveries led to rising world prices. - SIGNIFICANCE: This event demonstrates the main downside of adhering to the Gold Standard (lack of domestic monetary policy sovereignty)

2nd Industrial Revolution

Electrical power, cheaper technologies and communication, and flurry of inventions that brought forth new products or revolutionized the production of old ones (Cotton Gin, etc...) Demand for consumer goods other than food, clothes and shelter doubled. The rapidly industrializing nations such as Germany and US had the advantage of lateness and so were well positioned to adopt new patterns of production and consumption, making their factories bigger and better. But history weighed on the British manufacturers, making it harder and more costly to implicate all the latest technologies. This serves to partially explain why Britain diminished as a global power during the end of the Golden Age.

Factor abundance and factor intensity

Factors of production are the resources needed to produce goods. Factor abundance is how much of a factor a country is endowed with (I THINK???) and factor intensity is how much of a factor of production is used to make a good (so, like, capital . This is very important for Heckscher-Ohlin. HO is based on two suppositions: that countries differ in their relative endowments of factors of production (differ in their factor abundance) and secondly that goods differ in their factor intensities (i.e. it takes more capital than labor to make computers and more labor than capital to make t shirts). With these assumptions, we can say that a factor of production is cheap where it is abundant, and a country will export those goods whose factors of production that it has in abundance to the rest of the world (that is HO theorem) and explains why countries have a comparative advantage in goods with which their abundant factors are made. This is fundamental to stolper-samuelson ("Free trade benefits the factor of production that is relatively abundant and harms the locally scare factor")

Fixed exchange rate regime

Fixed regimes require constant government involvement to counteract the effects of market forces - Because market forces constantly impinge on the exchange rate, the government has to intervene in the FOREX market with purchases and sales of foreign and domestic currency in order to keep the exchange rate stable ("fixed") Ex. FOREX intervention to maintain a fixed-rate regime When the currency appreciates, the central bank sells its currency in the FOREX market - This increases the supply of the currency causes its value to depreciate - The foreign currency it acquires from these sales becomes part of its foreign exchange reserves • When the currency depreciates, it buys its currency, using its stock of foreign reserves to make the purchases - This decreases the supply of the currency, causing its value to appreciate Benefits • Promote trade (exchange-rate stability means more trade and investment) • Lower inflation (fixing to the currency of a low inflation country forces the government to keep prices in line) Costs • No domestic monetary policy autonomy (interest rates can't be used for domestic purposes) • Risk of currency crises (speculative pressures can result in a forced devaluation)

Government policies and globalization

Government policy can promote or deter trade/globalization. One of the two causes/drivers of globalization, along with technology. Policies that can drive globalization include lowering or eliminating barriers to trade (like tariffs), removal of capital controls, and removal of immigration restrictions. Because government policy can be reversed, globalization isn't inevitable. The interwar period is proof of this.

Francis Cabot Lowell

He set up the Boston Manufacturing Co in Waltham, MA after memorizing the technologies whilst touring English mill. At the time it was illegal to export blueprints. He created the first planned industrial city which drew in labor from farms, mostly young women ("Mill Girls"). This helped the rise of the US Textile industry. He helped lead textile industries in the US as a protectionist seeking industry.

Home-country bias

Home bias is the tendency for there to be more domestic trade than international trade, all factors considered. If there was complete globalization, this wouldn't exist. Example of there being more Canada-Canada trade than US-Canada trade between the same distance. Causes of this are tariffs, differences in currency

Speculative attacks

If speculators expect that a government will run out of foreign reserves, they will sell the currency and bring about a devaluation. Their goal is to get out of the currency while the fixed regime is still in place, still at high value. As speculators sell the currency, this depreciates it further, allowing them to make a huge profit off of it. Ex: Thai Bhat, Mexican Peso Crisis

Dispute settlement mechanism

If two countries can't solve a dispute on their own, the dispute settlement body (DSB) selects experts in the field who hear the case and present a report, which must be followed unless everyone in the WTO disagrees. This creates trust through reciprocity. If a member country of the WTO believes that a counterpart is in violation of their trade agreements, he must follow the particular Dispute Settlement procedure instead of seeking unilateral action. The duration of dispute settlement is about a year and a few months. It involves the parties and third parties to witness the case, be involved in panels in order to discuss the concerns. At the end of a year, the Body will adopt a report. If the plaintiff submits an appeal, the process could take longer. However they must respect the conclusions of the Settlement Body. This is a way of preventing Prisoner's dilemma by imposing punishments for lack of cooperation and honesty. An example of this is the EU's banana import regime, which favored bananas from French and English colonies. Th EU didn't follow the DSB's ruling, so the DSB additionally ruled that the US could put equivalent sanctions on the EU.

Hyperinflation in Germany

In order to pay the massive reparations to victors after WWI (due to war guilt clause at the Versailles Treaty), Germany simply printed money. Germany broke from the gold standard because they wanted the greater autonomy in relation to their monetary policy. Germany devalued, and massive hyperinflation was the result (> 50% per month). By the end of 1923, Germany prices were 1.3 trillion times higher than in 1914. Economic recovery required stabilization, and since the US government did not take a leadership position, US finance took the lead. In the Dawes Plan of 1924, US bankers took over the German central bank and fiscal policy. The Dawes Plan stabilized the German mark and brought increased loans/investment from US banks. This created a flow of money from the US to Germany, which made reparations to the victor nations, which then in turn could pay off war debts to US (aka the reparations-war debt triangle). - SIGNIFICANCE: Even though hyperinflation in Germany was reversed due to the Dawes Plan, it had long term effects on the politics of Germany. Hyperinflation led to massive unemployment, widespread fear, and anger at the international community for forcing Germany to pay for reparations of WW1. Hyperinflation became one of the points that fascist dictators in central/eastern/southern Europe used to bolster a turn to autarkic-authoritarian regimes (Mussolini in Italy, Hitler in Germany).

Chinese Exclusion Acts

In the labor-scarce/land-abundant Areas of Recent Settlement, inequality rose due to the Great Migration. The massive influx of low-skilled workers competed directly with native residents at the bottom of income distribution. This can be explained by Heckscher-Ohlin Theorem because of the movement of labor from a place where it was abundant to a place where it was scarce. The increase in the supply of workers lowered unskilled wages relative to skilled wages. These wage decreases resulted in a "backlash" against globalization. The U.S. began imposing restrictions on immigration in the 1880s: literacy requirements, head taxes, Chinese exclusion, etc. In 1882, Chinese exclusion act suspended Chinese immigration for 10 years, this developed into a permanent ban. In 1921, national quota system banned all Asian immigration. This ended era of mass migration and restricted globalization all in response to rising inequality due to immigration. - SIGNIFICANCE: Similar policies of excluding immigrants competing with the bottom of the income distribution took place in many ARS nations like Argentina, Australia, Canada, etc. These policies demonstrate how countries reacted to the rise in inequality in New World (and the fall of inequality in Old World). This reflects a general backlash against the internationalism and free migration that had defined the Golden Age.

"Beggar-thy-neighbor" trade policies

Keynes argued that the modern world no longer consisted of the political economies of the Golden Age. The modern world was in a more organized form capitalism and the rise in industry (consumer durables revolution of the early 1900's in the US/ mass production) had changed the way people accepted prices. During the golden age, most people were farmers, individual workers, or in small firms. People accepted whatever prices they had to pay, and whatever wages they were given. With the consumer durables revolution, large corporations were able to have market power that allowed them to have some control over their prices. In addition the increases in the amount of industrial laborers ushered in unionization. Workers were able to organize into unions that could resist the wage cutting that would have taken place during the Golden Age. - SIGNIFICANCE: Essentially, the rise in organized labor (and in corporations) meant that prices and wages did not decline as needed to sustain or restore balance in the economy. This meant that efforts by the British to bring the Gold Standard back into place would be near impossible. Furthermore, it helped reinforce Keynesian economics in the belief that the government had to intervene using fiscal and monetary policies to influence market forces and aggregate demand.

Keynes' Economic Consequences of Peace

Keynes's criticism of the Versailles Treaty. Argued that the demands on Germany were immoral and impossible to pay off. The war reparations placed on Germany by Belgium and France would only lead to disaster. - SIGNIFICANCE: This book accurately predicted that German's would have a hard time paying off these debts and that it would lead to revenge for the war reparations it was being forced to pay.

King Leopold

King Leopold was the king of Belgium who was given direct control of the territory in Africa called the Congo Free State (he was given this area fairly easily because England wanted to have a buffer in between its territories and France's). Leopold claimed to control the Congo in order to improve the lives of those living within the territory. In reality, he held a monopoly on the primary exports like rubber and ivory and gave nothing back to the people he was supposedly trying to help. He did all of this through extensive military violence and even created incentives by local rubber plant owners to cut off the hands of people harvesting rubber. Leopold's 25 years of maladministration, plunder, and violence caused the deaths of millions of Congolese and destructed much of the region's social structure. Colonial masters disrupted local societies and didn't give the Congolese an opportunity to adopt any useful technologies or ideas from abroad. This made it impossible for residents within this region with extraordinary natural resources to use the resources to develop their economy. Leopold & his free state are responsible for the poor economic performance of Congo while they ruled, and this consequently caused divergence and stagnation in later decades

Arbitrage and the law-of-one price

Law of one price is the theory (only exists hypothetically) that in a world with completely free trade, a commodity is the same price regardless of location when currency exchange rate is taken into consideration. This is possible through arbitrage, which is when people simultaneously buy and sell commodities/securities in different markets in order to take advantage of different prices for the same good. Through participation in arbitrage and the assumption that there are no barriers, differences in prices are eliminated.

Floating exchange rate regime

Market forces determine the exchange rate. FOREX prices are determined by the market and can change rapidly due to the demand and supply change. Once the choice to float is made, the government does nothing(no control). This reduces globalization. Benefits • Domestic monetary autonomy (governments can choose any domestic interest rate) • Avoids speculative currency crises Costs • Reduces Trade (exchange-rate volatility raises costs of trade) • High inflation (if a government cannot control inflation without a fixed exchange rate)

The Gold Standard

Nations fixed the value of their currencies to gold as opposed to another currency (currency backed by actual amounts of gold). This was very beneficial because once you knew the exchange rate in gold, you could easily figure out the exchange rates in other currencies. This facilitated trade by reducing risk and reducing cost and facilitated globalization. Controversial because gives no domestic monetary policy sovereignty (cannot counteract business downturns ex. Great Depression 1873-1896) Countries used gold to trade with each other. However, during the Great Depression, farmers were losing and the rich "east" were winning. Prices fell drastically in 1890 which caused people to be against the gold standard. Farmers wanted the government to push prices of their goods higher. Soon the gold standard was abolished.

Marginal rate of substitution/opportunity cost

Opportunity cost is the cost of increasing production of one good measured in terms of foregone production of the other. Marginal rate of substitution is how much of one good you must forego to get the other. It is also the slope of the production possibility frontier.

Prisoner's dilemma

Prisoner's dilemma is the game theory game in which two parties must choose between cooperating and defecting (i.e. two countries deciding rather to open up to free trade). Cooperating is the pareto efficient option; however, without a guarantee that the other party will cooperate, a party may be tempted to defect. Lack of trust/cooperation is a major impediment to trade. Countries can create a trust in three ways: one is through iterated rounds, reciprocity strategies (like doing unto the other country what they do to you "tit-for-tat"), and governments caring about future payoffs. The WTO achieves the first two. Countries know that all other WTO members will be there for years to come, so they have iterated rounds. The WTO collects and disperses info about each country's trade policies and has a dispute settlement mechanism, making it easy for countries to monitor each other (reciprocity).

Coalition of Iron and Rye

Protectionist policies in Germany towards the end of the Golden Age were supported by those who held relatively scarce resources. Germany was the breadbasket for western Europe before the Golden Age and globalization. After the land- abundant ARS/ New World began to flood the market with cheap grains Germany lost its comparative advantage in grain production in international markets. In addition heavy industry (and its laborers) pushed for industrial tariffs because their comparative advantage was also taken away when placed on an international scale. A coalition led by Junkers (and by the president Bismarck) called the Iron and Rye Coalition kept tariffs high due to malapportionment in the Bundesrat.

Rise of organized labor

Rise of organized labor is labor unions. It happened in the North in the US during the industrial organization (in the post-Civil War US). It lead to an increase in restrictions on immigration because labor was a scarce factor in the US (and the Americas). This is a part of the whole "North wants tariffs and protectionism while south wants free trade."

Short-staple cotton

Short staple: dense, hard-to-remove seeds, but grows in wider range of climates (all over the "upland" South) (compared to long staple cotton which had long, soft vibers where the seeds could be easily removed) • For US to supply the world with cotton, it had to move to short staple cotton and figure out how to how to separate seeds from the cotton fibers • Technological breakthrough : The Cotton Gin.The gin made it possible to use heavily-seeded "shortstaple" cotton, which could be grown in upland areas more readily than longstaple cotton. England's demand for raw cotton increased incentives to grow cotton while the cotton gin made it possible.

Smooth-Hawley Tariff Act of 1930

Smoot-Hawley added to the extent of the Fordney-McCumber Tariff. Endowments and interests from farmers along the Canadian border and Eastern seaboard who faced competition from cheap Canadian goods and light manufacturing industries that were labor-intensive and faced foreign competition. Republican protectionist interests in Congress traded their votes for imposing tariffs on products produced by import-competing industries. President Hoover did not intervene. Both Presidency and Congress were controlled by Republican party (Protectionist). - SIGNIFICANCE: As the world's net creditor, the US needed to open its markets so that deficit countries could earn foreign exchange and pay their bills. Instead, US raised tariffs on over 9,000 imported goods to record levels, triggering retaliation by trading partners. This started an era of economic isolation. Started a tariff "war" defined by "beggar-thy-neighbor policies" that imposed cost of adjustment on foreigners.

Conquest economies

Spanish America's native population for labor was in Mexico, Central & South America. Huge grants of land were distributed, often including claims to stream of income from native labor, and of mineral resources among privileged few. The non-tradeable property rights to tribute from sedentary groups of natives gave large landholders the means & motive to operate large scale. The distribution of wealth remained highly unequal over time. The valuable mineral resources & abundance of labor with low human capital were major contributors to unequal distributions of wealth & income prevalent in this economy.

Plantation economies

Specialized in crops and their economies came to be dominated by large slave plantations, their slaves of African descent. The greater efficiency of the very large plantations and overwhelming fraction of the black slave population made distributions of wealth & human capital extremely unequal. The long-run success & stability of the elite were also facilitated by their disproportionate political influence. The greater inequality in wealth contributed to the evolution of institutions that protected the privileged elites and restricted opportunities for the majority of the population to participate fully in the economy even after slavery was abolished. ->use example of lack of free education, restrictions on voting (literacy) so only elites could vote

Antebellum tariffs

Tariffs before the civil war fluctuated dramatically in terms of which party was in power. When factor scarce Republican manufacturers and capitalists were in power, they rose tariffs as protectionist policies to maintain domestic advantage in the market, while Southern factor abundant landowners would decline tariffs because they benefited from world prices and the free accessibility to global goods. Ended with high tariffs because south lost civil war.

Technological change and globalization

Technology "shrinks" the distance between countries/markets and facilitates communication, both of which advance globalization. Some major globalizing technologies were railroads, steamships, containers, telegraph, telephone, internet. The other major factor in advancing globalization is government policy, but unlike technology you can undo/redo policy. Once technology is released, it's out there.

Pax Britannica

The "British Peace" was the name attributed to the period after Britain's defeated the French in 1815, leaving them dominant. Mercantilism was no longer essential for national security. Britain's naval power meant sea lanes were safe and world markets were open for business. This led to the 100 year's peace which was conducive to negotiating freer trade with other countries. With peace, governments no longer needed trade taxes to pay for costly wars.

Balance of payments surplus

The BOP is the sum accounting of a nation's transactions with the rest of the world. Occasionally nations run imbalances & must adjust. Under a floating regime, adjustment works entirely via the exchange rate. Under a fixed regime, BOP adjustment works entirely through changes in domestic prices. If you're in surplus, your currency depreciates, so govt buys its currency using its stock of foreign reserves to make purchases This reinforces the basic tradeoff: Nations can have a stable exchange rate or they can stabilize domestic prices, but they can't do both at once!

Repeal of the Corn Laws

The Corn Laws were protectionists tariffs on agricultural products that originated during the Napoleonic wars for "national security grounds", when food security became primordial. But Land in Britain was so uneconomic that landlords demanded higher tariffs. This became a dominant issue because Britain's abundant factors, capital and labor favored free trade due to the benefits of the technological and communication revolution. The corn laws worked against comparative advantage and labor and capital suffered through high costs. Relevant to Stolper-Samuelson - abundant factor = free trader. Opposition spear-headed by capitalists and skilled labor party, the Whigs, and lobby, Anti-Corn Law League. The Industrial Revolution has shifted economic power from the landed elite to urban areas, but the British electoral system still favored landlords due to malaportionment. Reform Act of 1832 paved the way for repeal by giving seats to large cities, so industrial districts had greater representation. The Irish Potato Famine also outraged public opinion when Corn Laws had limited emergency food imports. In 1846 Corn Laws were repealed. Britain became first trading nation, which spread to other european nations. Started Golden Age.

Napoleonic Wars, 1793-1814

The English "Corn Laws" originated during the Napoleonic wars. They were justified on "national security" grounds for maintaining a steady/domestic supply of grain. After 1776, the US was cut off temporarily from the world economy by wars and embargoes notably, the Napoleonic Wars. These wars between the French and Great Britain demonstrated revolutionized armies because of the manner in which they played out at an unprecedented scale. This stimulated the rise of manufactured goods that thrived in this sort of artificial setting. Yet, at the end of the wars, the manufacturers faced extinction because of the end of this artificial setting. Therefore, they demanded to be protected from the impact of the world market. At the end of the war, it was no longer necessary to build up militarily - Hundred Years Peace/Pax Britannica. This led Britain to free trade.

Navigation Acts

The Navigation Acts were a trade policy that was a part of British mercantilism in the 16th-18th century. Mercantilism encouraged protectionism and allowed Britain to accumulate wealth and power through exports. Specifically, the Navigation Acts called for all goods going to/from the colonies to be carried in British ships, specified that certain goods could only be exported to Britain, allowed only Britain to provide manufactured goods to the colonies, and prohibited manufacturing in the colonies. These acts were important because they increased British exports significantly. Consequently, they also increased the power of the British military because it provided more ships and more income to fund a strong navy. However, mercantilism and the Navigation Acts more specifically were highly conflictual policies, as evidenced by the frequent wars during this period. 1. Goods going to and from colonies had to be carried in British ships - This promoted British sea power and denied this benefit to rival nations (France) 2. "Enumerated Goods" such as tobacco, rice, and sugar could only be exported to England. - This lowered the prices of England's imports and denied raw materials to rivals (France) 3. Imposed a British monopoly on the provision of manufactured goods to the colonies - Ready outlet for British manuf. goods; denied this to rivals 4. Colonies forbidden from manufacturing - Kept colonies importers of British manufactured goods Acts were very successful at raising British exports - 1700-1800: British exports up 10-fold • Mercantilism could not have succeeded without British military power to enforce restrictions • Conversely, the more successful mercantilism was, the stronger the British military became - It generated a bigger fleet of (armed) merchant ships and the revenue needed to amass military power • International system was highly conflictual - a cause and a consequence of mercantilism - Frequent wars between European great powers; Britain was at war almost 70% of the 18th century

Nathan Meyer Rothschild

The Rothschilds were successful Jewish/ German noble bankers with global connections and diplomatic influence. Nathan reinforced international finance, the gold standard, and free trade. He used his fortune and influence to support global economic integration and derived enormous financial benefits from the worldwide triumph of this commitment to economic openness. He fought to keep global financial markets accessible and stable and bankrolled ambitious ventures in southern Africa to bring new investments to new markets. Was able to bring 98% of South African diamond production under their control.

Meiji Restoration

The Tokugawa Shogunate lost face and was deposed in the Meiji Revolution of 1868 • The new leaders began an ambitious program of modernization, embracing the technology and the capital of the West • "Meiji" means "enlightened rule" - The goal was to combine western technical advances with traditional Japanese values → led to Japan convergence Japan's Rapid Convergence • After 1868, Japanese companies applied Western technologies to produce goods that could be sold in international markets - e.g. mechanized silk textile production • In just one generation, Japan industrialized, grew rapidly, and converged economically on the west • In just one generation, Japan also became a great military power (which may have been the main goal all along) - Japan defeated China in the SinoJapanese War of 1894-95 - Japan defeated Russia in the RussoJapanese War of 1905

Destabilizing US policies after World War I

The US refused to forgive war debts which would've fixed the issue of reparations (liberty loans). US also raised tariffs instead of lowering them, which intensified adjustment problems (Fordney- Mccumber and Smoot-Hawley). Finally, the US refused to join the League of Nations, which undermined the global efforts to prevent another war. - SIGNIFICANCE: America's domestic policies had not developed as far as its economy had, and the United States did not take up the leadership position that was left by England.

Post-war European economic stabilization

The Versailles Treaty created new countries called "successor states" in central & Eastern Europe. These states faced serious economic challenges. They had to balance budgets & control inflation while facing strong political pressure from civil servants & the unemployed. States like Hungary and Bulgaria faced debilitating hyperinflation, and the worst was seen in the collapse of Germany's economy post ww1. Dawes Plan was established in 1924 after hyperinflation had wiped out the life savings and purchasing power of millions of central and eastern europeans. The Dawes plan was taken up by western bankers (NOT THE US GOVT.) in order to stabilize the mark and help regularize the reparations payments to the victors of ww1. This action was successful and the German economy began to grow again after the Dawes Plan. - SIGNIFICANCE: Despite this post war economic stabilization, the collapses of the 1920's led to an enduring political legacy. Middle classes determined that the prewar elites were not fit to rule.

Wizard of Oz Allegory

The Wizard of Oz is an allegory for interests that opposed and supported the Gold Standard. "Oz" can also refer to ounce, which was a way of measuring gold. The yellow brick road designates gold itself, and its path leads to Emerald City, a parallel to Washington and Congress who implemented the standard. The scarecrow demonstrates the Midwestern farmer, not in favor of the gold standard, portrayed as having "no brain", relating to how they are seen in society, and how their voice is not given any weight. The Tin Man who lost his heart refers to the manufacturers who are in favor of the gold standard, heartless because they live a repetitive life on the assembly line and because they only consider their interests and not the struggling farmers. The Cowardly Lion represents Bryan, the champion of the anti-gold movement, who was a great orator, but never actually won the presidential election. Finally, Dorothy stood for traditional farm values and was modeled after Mary Lease: "Raise less corn and more hell". This allegory intends to demonstrate the conflicts between different industries on the subject of the gold standard and its effects.

Productivity (Y/L)

The key to economic growth is productivity, the output (Y) per hour of work (L), or Y/L. Productivity is the explanation for why some countries are rich and others poor. Countries that lag on productivity are behind in growth. Higher productivity requires better technology or more capital. If there's nothing impeding the flow of technology & capital, than countries behind in productivity should have higher productivity growth. Globalization should spread technology & capital to poor nations through trade, investment, migration, etc & cause convergence.

International division of labor

The outcome of globalization, this refers to the specialization of individual nations in certain goods, those that have comparative advantage in because of endowments in particular factors of production/ factor intensities (Heckscher-Ohlin). This has led to a global industrial shift, in which production processes are relocated to developing countries. Leads to differentiation of economic activity. This occurred majorly in the decades leading up to WW1 (after the first great depression). It completely reconstructed economies, with entire towns focusing on the production of just one good, and countries importing foods and goods that they once grew themselves (much less productively). It raised productivity (Y/L) at national and international level. However, even though welfare increased, there were also losers from international division of labor. That is, the import-competing industries, as dictated by S-S.

Mercantilism

The theory and practice prior to the 19th century free trade era. It aimed to increase a nation's wealth and power by establishing colonies and heavily regulating their trade for the purposes of promoting the power of the imperial colony. It was the opposite of free trade based on comparative advantage. It defined welfare in terms of maximizing exports, using the surplus for military investment. England's goal was to keep import prices artificially low, export prices and demand for English shipping artificially high and overall accumulate wealth and power. One of their policies was the Navigation Acts which allowed/promoted these goals by only allowing the shipment of english goods to and from its colonies by english boats.

Protectionist policies

The theory or practice of shielding a country's domestic industries from foreign competition by taxing imports (Ex. placing tariffs and quotas on imports or subsidizing tax cuts granted to local businesses). The idea is anti-globalization and favors those who hold relatively scarce resources. For example, Germany was land-abundant with scarce capital, however, once open to the global market, the country loses its comparative advantage (aka disadvantaged) because other nations are more abundant in land and capital, like England. Protectionism is a policy that protects domestic industries against foreign competition by means of tariffs, subsidies, import quotas, or other restrictions placed on the import of foreign goods. Significance: For example, protectionist policies in Germany towards the end of the Golden Age were supported by those who held relatively scarce resources. Germany was the breadbasket for western europe before the Golden Age and globalization. After the land- abundant ARS/ New World began to flood the market with cheap grains Germany lost its comparative advantage in grain production in international markets. In addition heavy industry (and its laborers) pushed for industrial tariffs because their comparative advantage was also taken away when placed on an international scale. A coalition led by Junkers (and by the president Bismarck) called the Iron and Rye Coalition kept tariffs high due to malapportionment in the Bundesrat

Grain Invasion

The transportation revolution (steam and rail) allowed farm products from the Areas of Recent Settlement (U.S., Canada, Australia, and South America) to enter European markets, exposing Europe's farmers to severe competition. Before this "grain invasion," Prussia and Eastern Europe had been the breadbasket of Europe (aka: producing grain for europe). The imported grain from the ARS threatened farmers in Europe because of their abundance and low prices. In addition, technological changes in agriculture in these ARS allowed for dramatic improvements in farm productivity that greatly benefitted land-abundant countries (therefore hurting European agriculture). - SIGNIFICANCE: This grain invasion resulted in Germany losing its comparative advantage in grain production in international markets. There was an adoption of protectionism for agriculture in central Europe, as seen in Germany. The coalition of Iron and Rye led by Bismarck helped protect the interests of the Junkers (landholding elite) and heavy industry in Germany. It resulted in high tariffs, and protected industries that Germany did not have a comparative advantage in. In England, the grain invasion pushed farmers to move away from grain production into livestock and dairy production. The grain invasion also pushed the repeal of the Corn Laws (english seeing destruction due to potato famine, seeing harm of protectionist tariffs).

Path dependence

Theory of path dependence originally developed by economist to explain technology adoption processes and industry evolution. The nature of any equilibrium depends partly on the process of getting there.

Settlement economies

These colonies were in the northern part of North America mainland. Their development was based on laborers of European descent who had high & similar levels of human capital. This class had homogenous populations. Equal distributions of wealth were encouraged by limited advantages to large producers in the production of grains & hays. The climate was suitable for small family farms/ more equitable. This demonstrates how factor endowments affect inequality.

English landed aristocracy

They were the owners of the majority of land in Britain. Support for the Corn Laws was greatest amongst landed aristocracy in rural area (SS theorem: they're the owners of the scarce factors of production). The Tory Party had its base in landed wealth. They possessed much control over politics due to nobility & their interest in maintaining protectionist policies. After fixing malapportionment in parliament, these elites were replaced by big city industrialists in Parliament.

Urban/rural and Class-based cleavages

This comes from Stolper-Samuelson ("Free trade benefits the factor of production that a country is relatively abundant in and harms the locally scarce factor"). An economy can be classified by its land/labor ratio and it can have an advanced or backward economy (high or low capital). Each classification produces a different cleavage in the economy, for example an advanced economy with a high land-labor ratio (high in land and capital, low in labor) will see a class-based cleavage where owners of capital and land want to trade but the labor force does not. Those who gain from trade will be emboldened politically. TL;DR: The owner of the scarce factor between land, capital, and labor will not want to trade. Those who do benefit from trade will be politically emboldened.

Areas of recent resettlement

This is the name attributed to those areas where labor flowed from the European periphery to where it was scarce & expensive, in the New World, notably the US, Canada, Latin and South-America, as well as Australia. Heckscher-Ohlin Theorem explains these patterns of factor flows from abundant factors to scarce factors because of the difference of wages. This led to a decrease in wages in ARS, and higher wages in the Europe. Therefore inequality fell in the Old World and increased in the New World.

Competitive devaluations

This is when an abrupt national currency devaluation by one nation is matched by a currency devaluation of another, especially if they both have managed exchange-rate regimes. Currency devaluation improves a nation's export competitiveness since it lowers the cost of goods exported from that nation for overseas buyers. It is a "beggar-thy-neighbor" policy since a nation is trying to gain an economic advantage without considering the harm it may have on other countries.

Dawes Plan of 1924

This plan was created by an American banker in order to alleviate the burden of war reparations owed by Germany to the allies and by the allies to the US. US bankers took charge of the German central bank and fiscal policy. This created a cycle of money from US to Germany, which made reparations to other European nations, who then used the money to pay off war debts to the US. This was an effective but risky solution to the war debts issue.

Commodity price convergence

This refers to the convergence of prices during the Golden Age, when the difference in prices of the same products in markets across the world fell. This is relevant to the Law of One Price, which is considered a way of measuring the economy's globalization in comparison to complete globalization. The cause for these price convergences is due to improvements in transportation and communications that helped integrate these markets.

Cobden-Chevalier Treaty of 1860

This treaty between UK & France negotiated a bilateral tariff reduction and was one of the greatest triumphs of the free trade movement. Britain abolished/lowered its tariffs on French goods while France did the same for British manufactured goods. English-French trade increased 200+% over the next 20 years. The treaty was then used to negotiate similar treaties with other European countries. These treaties had Most-Favored Nation clauses that bound parties to extend benefits to other nations. This brought an era of freer trade.

Enclave economies

an economic system in which an export based industry dominated by international or non-local capital extracts resources or products from another country. In these situations, the "enclave economies" do not integrate into the rest of the economy

War debts and reparations

• Reparations (war damages): Germany required to pay $33 billion in damages to victors following the Treaty of Versailles - "War Guilt" Clause: "Germany accepts the responsibility for causing all loss and damage" during the war. - Reparations a huge burden, equal to 10% of German GDP per year - In short, the treaty imposed a harsh "Carthaginian Peace" on Germany Debt: During the war, European nations borrowed heavily from the U.S. to finance the war • U.S. government lent a total of $10.35 billion via the "Liberty Loan" program of 1917-18 • After the war, the U.S. refused to reduce or forgive these debts - a decision that posed major problems and paved the way for the Great Depression and WWII