The Economy โ CORE Textbook
Chapter Summary
Unit 18: The Nation and the World Economy
How the integration of national economies into a global system of trade and investment provides
opportunities for mutual gains and conflicts over the distribution of the gains
Opening Narrative: The Steamship Manila (1899)
โข The Manila's 1899 voyage in and out of Genoa encapsulates the whole unit. Inbound, it offloaded
cheap Indian grain made possible by the Suez Canal (1869), new railways, and steam shipping โ
delighting Italian consumers but devastating local farmers. Outbound, it carried 69 emigrants to the
US; about 750,000 Europeans made this voyage annually in the following decade.
โข Governments responded to the grain shock differently: France and Germany raised tariffs to protect
farmers (at consumers' expense); Denmark pivoted into dairy, using cheap imported grain as feed
for products that couldn't be cheaply shipped. Some Italian workers moved into the booming textile
industry. The conflict was between producers of different commodities, not simply rich versus poor
โ a pattern that recurs throughout the unit.
18.1 Globalization and Deglobalization in the Long Run
โข Core argument: Global economic integration has followed an interrupted path โ not a steady
march. Two distinct eras of expansion (Globalization I, roughly 1870โ1914; Globalization II, 1945
onward) were separated by interwar deglobalization driven by government policy, not technology.
โข Measuring globalization: The best indicator is narrowing price gaps between importing and
exporting countries, especially when combined with rising trade volumes. Trade volumes as a share
of GDP and bilateral trade flows are supporting measures. World merchandise exports rose from
~1% of world GDP in 1820 to ~8% in 1913, fell back to ~5.5% in 1950, then climbed to 26% by 2011
(Fig. 18.2).
โข Price gaps and arbitrage: When trade costs fall, the gap between the export-market price and
import-market price narrows โ traders arbitrage it away. The Anglo-American wheat price gap
nearly vanished between 1840 and 1914 as steamships and railways slashed freight costs (Fig.
18.4). Similar convergence occurred across most USโUK commodity pairs 1870โ1913 (Fig. 18.5);
sugar was the main exception due to tariff protection.
โข The interrupted pattern: Trade costs fell 1870โ1913, rose sharply in the interwar period
(governments raised tariffs to fight unemployment after 1929), then fell again from the 1970s as
liberalization and improved transport resumed (Fig. 18.6). Tariffs remain higher in low-income
countries, though most have reduced them substantially since the 1980s (Fig. 18.7).
โข Multinationals: Offshoring illustrates firm-level globalization โ Ford began abroad in 1904
(Canada), expanded to Australia (1925) and the Soviet Union (1930); by 2016, 144,000 of its
201,000 employees were outside the US (Fig. 18.1). National borders give governments extra policy
tools (tariffs, immigration controls, capital controls, monetary policy) but limit their reach โ there is
no world government to enforce contracts globally.
18.2 Globalization and Investment
