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Ryerson University
ECN 220
Michael Jolly

ECN 220 EVOLUTION OF THE GLOBAL ECONOMY II Study Guide For Sections 1-3 of the Course Outline In studying the period between the two wars the emphasis is on the Great Depression and the characteristics of the international economy which made an economic collapse possible. THE INTERNATIONAL ECONOMY OF THE 1920s The starting point is the effect of World War I on the international economy and the failure during the 1920s to deal effectively with the legacies of the war. We consider, firstly, problems related to international trade and, secondly, problems connected to the international financial system. International Trade 1. Disrupted Trade Patterns : The war resulted in the permanent loss of markets by European countries to the United States and Japan. They faced difficulties in adjusting to this situation throughout the 1920s. 2. Overproduction of Some Primary Products : This was due to : (1) Increased production of food during the war by countries that had previously been large importers. Once the war was over their higher levels of production continued. (2) Increased agricultural productivity as new technology was more widely adopted. (3) A shift in consumption away from cereals (e.g. wheat) and toward more income elastic foodstuffs (e.g. dairy products). The result was falling prices for many agricultural industries. 3. Overproduction of Some Manufactures : The problem was not so much one of overproduction in general as overproduction in certain industries (e.g textiles, iron and steel). This was partly a result of primary exporting countries building up manufacturing industries during World War I and partly the result of the adoption of new technology, which created problems of structural adjustment. 4. Protectionism : Restrictions on trade grew during the period for the following reasons: (1) As a result of the factors indicated above most countries experienced slow growth throughout the interwar period, which led governments to adopt protectionist policies to protect jobs. (2) New countries had come into existence or been recreated (e.g. Czechoslovakia, Hungary, Poland), so there were now more national boundaries. (3)Primary producers wanted to protect the new manufacturing industries they had created during the war. (4) Industrialized countries wanted to protect the agricultural industries which had grown during 1 www.notesolution.comthe war. Protectionist policies caused problems because (1) They ignored the principle of comparative advantage and therefore reduced world income. (2) US protectionism caused special problems since the United States was now the worlds leading creditor nation. When it made it difficult for its debtors to sell products they found it hard to obtain US dollars to service their debts. This problem relates to the international financial system and is covered below under that heading. International Financial System It was taken for granted after the First World War that the only feasible system of multilateral payments was the gold standard (in spite of the fact that this system had only really operated for two decades before 1913). For most countries it was assumed that the pre-war exchange rates should be adopted. They failed to take account of changes which had taken place since 1913: (1) Inflation rates had differed between countries. For example inflation after 1918 was considerably higher in the United Kingdom than in the United States but Britain went on to gold at the pre-war exchange rate (1 = $4.20), which meant that British goods were relatively more expensive than before in terms of US dollars. Unless prices came down in Britain or rose in the United States the United Kingdom would have difficulty exporting its goods (and so it proved). (2) There were new problems associated with high levels of foreign debt arising out of borrowing from the United States by its allies and the reparations bill imposed on German
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