Integration of the world economy

Question 1

Important Data

Answer 1

De Vries (2009): soft and hard definition of globalisation
Federico and Tena-Junguito (2016): growth of global exports data
Abramitzky et al. (2014): New World mass migration
O’Rourke (1997): European Grain Invasion

Question 2

What is market integration?

Answer 2

Process of combining separate markets into a one large economic region, ultimately leading to globalisation
e.g. regional markets integrating into one national market or national markets intergrating into one international market

Question 3

What is the soft definition of globalisation?

Answer 3

The process where markets keep integrating
Long-distance trade existed long before modern era
Examples:
1. Romans had Mediterranean market
2. Middle Ages: regional trading circuits
3. 16th century: Europe travelling on sea traded with Asia and the New World
Globalisation has happened for many centuries

Question 4

What is the hard definition of globalisation?

Answer 4

The outcome of market integration with large enough trade volume that prices are globally equalised
Federico and Tena-Junguito (2016): growth of global exports only started increasing drastically in the early 20th century
(reaching 100% in 1913 with around 20% dip until 1920 due to WWI)

Question 5

How does market integration benefit economies?

Answer 5

1. Creates Smithian growth through specialisation
2. Increases size of markets, ultimately improving economies of scale
3. Mobility of capital and labour (factors of production)
4. Creates competition which incentivises innovation in technology and economic efficiency
5. Allows more opportunities for technology transfer between economies and the exchange of ideas (improves human capital globally)

Question 6

What is the Heckscher-Ohlin Model (1933)

Answer 6

Countries will tend to export more of what they can most efficiently produce given inputs and resources required
Comprises of four theorems, but one stands out:
Factor price equalisation theorem: free trade leads to international equalisation of factor prices (capital and labour) assuming all both factors are equally productive

Question 7

What historical factors allowed market integration?

Answer 7

1. Trade policy (affects market access)
   1) Coutries can ban, regulate or tax imports (affecting market access)
   2) Example: Britain’s Corn Laws (1815-1846) where grain imports below certain price were restrained by applying import duties
   Result: importing grain became economically infeasible
   Purpose: protect domestic farming by only having domestic grain be the only option available for consumers
   Repeal of Corn Laws (1846) and Navigation Acts (1849): signalled Britain’s desire for free trade between Britain, its colonies and the rest of the world
2. Migration
   Abramitzky et al. (2014)
   1) Effect of reduced transportation cost: 1850-1914 mass migration of 30 million (majority being unskilled workers) from Europe to North and South America and Australia of which 49% augmented with New World’s labour force and reduced Europe’s labour force size by 20% by 1910
   The unskilled workers lowered the wages for New World low-skilled workers, causing inequality in labour-scarce countries of New World to rise
   Inequality in labour-abundant countries of Europe fell
   Many New World countries imposed immigration quotas in 1924 to protect domestic labour (prevent immigrants flooding in that brings down wages and cause inequality)
   Non-european emigrants didn’t experience the same mobility as many countries banned non-white immigration
3. Transport technology (affects cost of trading)
   Technological change increased capacity to move goods, people and information
   Railways through steam technology expanded with steam trains, replacing horse-drawn coaches
   Transatlantic steam ships and improvement in navigational tech made ocean travel faster and cheaper -> also enabled mass migration to the New World

Question 8

Elaborate on the European Grain Invasion

Answer 8

O’Rourke (1997):
1875: European Grain Invasion where New World’s cheap grain flooded European markets (Britain, Germany, France, Sweden and Denmark)
1. Effect on Europe (importer):
-> Europe’s domestic grain prices had to fall to compete with US imported grain
-> agriculture labour demand fell
-> but labour kept migrating to industrialised towns
-> nominal wages fell as labour supply increased
Win for capitalists as cost of labour fell while profits increased

2. Effect on workers differed for each country:
   1) Labour force % in agriculture (1871)
   Britain: 22.6%
   Sweden: 67.6%
   France: 50.5%
   2) Wages:
   Britain: urban real wages increased by 5-6% (cost-of-living effect overthrew negative effect on labour demand)
   France: wage fell by 3.5-4.5%
3. Effect on US (exporter):
   Raised grain prices for New World because of market integration
   -> greater demand
   -> set price higher to choke off excess demand