WEEK 3 Flashcards
When did Globalization’s First Unbundling occur?
1820 - 1990
What happened during the First Unbundling?
- A7 declined; G7 increased
- Economic globalization = integration of markets across space
Why did globalization’s first unbundling create this massive reversal of fortune?
- Technological revolution > Steam revolution
- Government policy; government decisions > trade liberalization
What is the DEMAND for a product/service?
- Specifies the AMOUNTS of a good/service that will be purchased at all possible price levels
- lower the price; greater the demand
What is the SUPPLY of a product/service?
- Describes the TOTAL AMOUNT of a specific good/service that is available to buyers
- higher the price; the greater the supply
Demand = Supply at Product and Quantity Equilibrium
- If the DEMAND is steep (inelastic) - the buyers’ demand is NOT sensitive to the price
- if the SUPPLY is steep - shows the degree of difficulty of making more products available for purchases
Prices depend on supply/demand for the product
- market is “local” = level of price depends on LOCAL DEMAND AND SUPPLY
- market is “global” = price and quantity are more stable
International Prices
- 1815
- Due to political forces: Napoleonic Wars; Congress of Vienna (1820); Pax Britannica (military power)
- Power is linked through military and economy
- Britain was becoming the first superpower
- Trade > Industrialization > Economic and Military Power (new source of wealth)
Who is Adam Smith?
- Wrote Wealth of Nations in 1776 > markets and industry are sources of wealth NOT JUST LAND
What is Ricardo’s Principle of Comparative Advantage?
- Trade raises all nation’s productivity
- Gains-from-trade reasoning based on individual warfare, NOT kingdom’s power and size
Main Trigger of Unbundling: Steam Revolution
- Introduced machines in the production process
- Radical reduction in trade costs
- Telegraph transformed communication
Steam Revolution: What is the principle of the Steam Engine?
- Heat has been converted into movement
- Britain became a powerhouse in TEXTILE PRODUCTION - used to produce textiles when connected to looms and gins
- 1825 - steam engine trains; locomotives
Steam Revolution: Internal Combustion Engine - Electricity
- 1886 - first cars
- 1880s - electricity used in homes
Steam Revolution
- Steamships evolve gradually
- Steam engine revolution - decreases transportation costs
- Trade costs fluctuated for various reasons
First Unbundling
- Lower trade costs drive “unbundling” of production and consumption
- Production no longer needs to be near consumption
2nd Trigger of Unbundling
Trade Liberalization
Trade Liberalization
- 3 periods (1815-1913)
- UK becomes a free trader
- Continent copies the UK
- Continental Reversal
First Period: UK becomes Free Trader
- Leads to 1846 Repeal of Corn Act (Free Trade in grain)
Second Period: Continent Copies the UK
- free trade policy spreads to Continental Europe in 1846-1869
Third Period: Continental Reversal
- Protectionism rises from 1879-1914
- Bismarck > Import Substitution Industrialization or Infant-Industry Argument
- Nationalistic view
Trade Liberalization: Tariffs
- 1820, 1875, 1913
- Tax levied at the border on import of products
- 2 types
What are the 2 types of tariffs?
- Ad Valorem - Tax expressed as a percentage of the purchasing price
- Specific Tariff - Tax expressed as dollar per unit
Import Substitution Industrialization or Infant-Industry Argument
- Protectionism policy aimed at inducing domestic firms to enter and produce in industries judged as important for the development of a country
- often failed b/c not competitive; need for continuous protection
- E.g. Bismarck
Three Periods to the First Unbundling
- Set Up (1815-1913) - Steam Revolution & Pax Britannica
- Confrontation (1914-1949) - Protectionism & Rebundling
- Resolution (1949-1990) - Transport/Trade Policy Reductions; more unbundling
Summary of Main Changes
- Trade BOOMED
- Northern Industrialization
- Southern DE-Industrialization - A7 decline
- Urbanization
- The Great Divergence
Why did China and India deindustrialize?
- Markets expand globally, but production clusters locally
- First unbundling paradox
- Induces manufacturing to cluster in factories/industrial districts to save on costs of moving ideas and people
What is a downfall of clustering?
- Creates know-how imbalances due to high communication costs
Why is industrialization a VIRTUOUS cycle for the NORTH, but a VICIOUS cycle for the SOUTH?
- Falling Trade Costs
- Comparative Advantage > Industrial Exports > Industrial Clustering (and specialization) > Industrial Competency > Comparative Advantage …
