10. The Growth of the world economy

Question 1

Population increase rate equation

Answer 1

Natural increase rate = Crude birth rate (cbr) - Crude death rate (cdr)

cdr is also known as crude mortality rate

Question 2

Pre-industrial vs. modern demographic regime

Answer 2

before: high fertility, high mortality
after: opposite

from before to after, it takes approximately 150 years for natural increase rate to be 0

Question 3

Dynamics of the transition

Answer 3

• first, mortality decreases because of better nutrition, better hygiene conditions, and medical improvements
• people do not immediately realize that mortality is declining and keep fertility unchanged
• then in the 20th century, fertility also decreases as people realise they live longer and child & infant mortality rates are lower
• fewer children because families opted for quality (better education) rather than quantity of offspring

Question 4

When and how did the transition start and spread?

Answer 4

• transition starts in FR in the late 18th century, then touches GB and Scandinavia (19th century), later on extends to other European countries
• International migrations are a further factor of the increase in population in the 19th century
  
  • once emigrated to countries where resources did not represent a constraint (USA, AU, CA, NZ, Argentina), people started to have more children

Question 5

Effects of acceleration in GDP growth as a result of population increase

Answer 5

1. Second industrial revolution
2. Globalisation

Question 6

Impact of 2nd industrial revolution

Answer 6

Cluster of new tech (Steel, Chemicals, Electricity, Internal combustion engine, Rubber, Oil Mechanical refrigeration, typewriter, sewing machine)

New tech features:

• capital-intensive
• science-based
• large-scale production
• continuous process
• integration of previously separated stages of production

Question 7

Impact of globalisation

Answer 7

• international division of labour
• technology transfer => international trade, international factor mobility

=> sources of greater efficiency / higher productivity

Question 8

Birth of the business cycle

Answer 8

• As countries industrialized in the course of the 19th century, old‐regime fluctuations gave way to business cycles
  
  • old‐regime fluctuations were
    
    • dictated by climate and diseases affecting harvests
    • tended to be local
  • in industrial economies fluctuations
    
    • depended on demand conditions
    • tended to display regular time patterns e.g. (2-3 years (Kitchin, 9-10 years (Juglar), 45-60 years (Kondratiev)
• As international market integration made progress, business cycles synchronized across borders via the commerce channel

Question 9

Timeline of trade policy from 19th to 20th cent

Answer 9

• GB abandons mercantilism and embraces free trade Free trade era (‘20-‘50)
• Return to protectionism (‘60-‘70)
• Globalization (‘70-‘13)
• Protectionism/neo-mercantilism, de-globalization (‘20-‘40)
• Growing trade liberalization (50-70)
• Second wave of globalization (80)

Question 10

What was the Corn Law?

Answer 10

The Corn Laws were tariffs and other trade restrictions on imported food and grain enforced in Great Britain between 1815 and 1846. They were designed to keep grain prices high to favour domestic producers, and represented British mercantilism

Question 11

Britain’s move to free trade

Answer 11

• A shift in public opinion towards freer trade began in the 1820s because of
  
  • pop growing very fast
  • industrialists having an interest in lowering/lifting tariffs
• By 1839, the Anti‐Corn Law League was formed under the leadership of Richard Cobden
• More decisively, political support to the repeal of the Corn Laws came from
  
  • 1832 electoral reform ⟶ urban middle classes were enfranchised
  • Irish famine (1845)
• The Corn Laws were eventually repealed in 1846
• Since then, Britain gradually embraced a policy of ever freer trade by abolishing other outdated mercantilist measures
• Eventually, the only surviving tariffs affected goods that could not be produced in England; their purpose was of a purely fiscal nature (to increase state revenues)

Question 12

The free trade era, 1860-70s

Answer 12

• The Cobden‐Chevalier treaty between Britain and France (1860) marked the starting point of the era of free trade and paved the way for further liberalisation
  
  • under the treaty, the British abolished all tariffs on the import of French goods except for wine and spirits
  • for their part, the French suppressed the prohibition to import British textiles and set a maximum import tariff of 30% on British goods
• Following the agreement, France negotiated bilateral trade treaties with several European countries, which in turn followed suit
• The result of these commercial treaties was a gradual lowering of trade tariffs
• One key element speeding up the process of liberalisation was the “most‐favoured nation” clause (MFN) adopted in most trade agreements
  
  • under the MFN clause, whenever a country made concessions to a trading partner by granting it lower tariffs, those concessions immediately applied to all other trading partners
• Interestingly, the MFN clause brought about liberalization in world trade doing without multilateral negotiations

Question 13

Countries that resisted free trade and why?

Answer 13

• Austria‐Hungary remained protectionist
• Russia never entered any trade agreement and in 1891 adopted even higher tariffs
• after the Civil War, the US commercial policy was dominated by a protectionist stance meant to shelter industrial manufacturers (northeners) from foreign competition
• reason: more control, nationalist outlook

Question 14

Remarkable effects of liberalisation of trade

Answer 14

• a substantial increase in world trade
• a process of industrial reorganisation in liberalising countries, aimed at increasing productivity and making domestic firms more competitive

Question 15

The Great Deflation

Answer 15

• The years 1873‐1897 were characterized by declining wholesale prices
• The phenomenon occurred even as output kept expanding and was ignited by a financial crisis hitting many countries in 1873
• Underlying the Great Deflation, however, were deeper causes
  
  • expanding industrial production in Britain, Germany, USA, and France
  • increasing international market integration ⟶ cheap goods flooding Europe from overseas regions

Question 16

Effects of the Great Deflation

Answer 16

• At the end of the 1870s, the Great Deflation took its toll among free trade supporters
• In continental Europe, landowners and industrial interests joined forces and called for protection
  
  • landed interests were hit by the lower price of overseas commodities that reduced land rents
  • industrialists sought to protect their nascent industries hurt by foreign competition
• First country to introduce protection was Germany, which in 1879 denounced its trade treaties and adopted a new tariff
• The German move was swiftly imitated by France (1881, 1892), while tariff wars depressed trade between
  
  • France and Italy (1887‐98)
  • Germany and Russia (1892‐94)
• Other countries followed suit with the notable exception of the small north European countries (Belgium, the Netherlands), Scandinavia, and Great Britain

Question 17

What was the international gold standard?

Answer 17

• The gold standard is an international monetary system that emerged ‘spontaneously’ after 1870 as more and more countries adopted gold as standard of value for their currency
• Britain is the first country to move in this direction at the end of the
• Timing of adoption:
  
  • 1870s: Germany, Netherlands, Belgium, Switzerland, Scandinavia
  • 1890s: Russia, Japan, Austria-Hungary, USA, etc.
  • 1914: about 40 countries on gold

Question 18

Why so many countries followed Britain’s move? (international gold standard)

Answer 18

• Britain was the world’s leading commercial power
• Britain was the largest capital-exporting country
• British pound was widely used as an international means of payments
• Britain had a widespread network of overseas banks

Question 19

3 basic rules for adhering to the g.s.

Answer 19

1. the value of the national currency in terms of gold must be set by law at a fixed parity
   
   • In practice, the exchange rates were allowed to fluctuate within a narrow margin Beyond that margin, arbitrage would restore the equilibrium
2. banks must convert to gold on demand any amount of banknotes
   
   • Central banks could not issue an amount of banknotes exceeding the amount of gold reserves
3. there must exist a free market for gold

Question 20

2 consequences of g.s. rules

Answer 20

1. The g.s. was a fixed-exchange rate monetary system
2. Under the g.s. the money supply depended on gold reserves, hence ultimately on the balance of payments
   
   1. An increase in gold reserves causes an increase in the money supply and vice versa
   2. => if the economy does well, gold flows in if it does poorly, gold flows out

Question 21

Benefits of fixed exchange rate

Answer 21

suppressed the exchange rate risk involved in international trade and lending ⟶ the g.s. significantly fostered trade and capital exports

Question 22

Mechanism of adjustment as a result of gs

Answer 22

The gold standard provided a mechanism of adjustment for balance of payments disequilibria

1. England runs a trade deficit => gold flows out of a country
2. Money supply declines => prices decrease
3. Foreign demand for British goods increases => gold flows in
4. Equilibrium is restored as Gold reserves go back to previous level; prices increase

The gold standard was much appreciated as a self-equilibrating system capable of

(1) preserving price stability;
(2) promoting growth

Question 23

Downside of gold standard

Answer 23

1. Central bankers intervened to avoid the disturbances (money supply contraction, decline in demand, fall in output) attached to gold outflows
   
   • By raising the official discount rate, the central bank could reduce gold outflows
2. The system was asymmetrical
   
   • When the Bank of England raised the discount rate, money flowed in and negative effects on the economy were mitigated
   • Other central banks were forced to follow suit to avoid gold outflows
   • Countries at the periphery of the system were the most severely hit by the adjustment process
     
     • decline in exports
     • domestic and foreign capital flight

Question 24

Asymmetrical system - England and Argentina

Answer 24

• when the Bank of England raised the official rate, the English economy slowed down and reduced imports of commodities
• a fragile and little developed economy like Argentina, whose revenues greatly depended on exports of a few commodities to developed countries, suffered from lower exports in the first place
• second, it suffered from domestic capital fleeing to England seeking higher returns, which further depressed local investment
• third, it suffered from reduced inflows of foreign capital as foreign investors feared Argentinian position was too weak and gold parity could not be maintained

Question 25

Summary of gold standard (normal times v. crisis)

Answer 25

• In normal times, moving the discount rate was sufficient to prevent a country from incurring serious problems
• In times of crises, the mechanism was not sufficient…
  
  • international cooperation among central banks was required: then central banks lent gold each other to the extent necessary to stem the crisis
  • ⟶ Baring crisis (1891) caused a major withdrawal of funds from the UK and threatened the gold parity of the pound: the Bank of England then organised a bailout of Barings and got help (gold on loan) from other European central banks to stem gold outflows
• advantages outstripped the downsides: the g.s. brought unprecedented growth and stability, was a synonym for prosperity
• At root, the g.s. worked because
  
  • governments and central banks were strongly committed to keeping the gold parity
  • markets regarded governments’ commitment as credible