ECON105 Lectures 3-4: Key dates and events in New Zealand’s economic
This diagram shows what the world looks like today. Red indicates the wealthy countries while
blue indicates the poor countries. This is a world of substantial difference between rich and poor
in term of countries.
The World Competitiveness scoreboard 2013 (http://www.imd.org/wcc/researchmethodology)
Ranks countries according to how competitive the countries are (Eg: How easy for the
countries to do business, to trade, to form contracts, to hire etc…)
Ranks and analyzes the ability of nations to create and maintain an environment in
which enterprises can compete.
Examples of the most competitive countries: Switzerland, Singapore
We can see that the wealthy countries are also among the most competitive countries.
Competitiveness and wealth of a country are correlated.
2013 Index of economic freedom shows how much freedom a country has economically.
Example: Are the countries able to form contract with whomever they want, do they
have to buy from state decided firms, are they able to import and export freely etc)
Countries with less freedom are among the poor areas of the world; Countries with
more freedom are the wealthy countries. Economic freedom and wealth are correlated. Corruption Perceptions Index 2012 showed that corruption and wealth are also correlated. The
least corrupted countries are among the wealthiest. New Zealand is one of the least corrupted
The notion of some countries are always rich and some are always poor is wrong
Back in 1 A.D,
The GDP (income) per capita in Western Europe was 576 dollars per person per year
On average, people were very poor no matter where they live. Rome was a little
wealthier because of the Roman Empire
- In year 1000 incomes went down further. The average infant could expect to live about
24 years. One third died during the first year of life. For those that survived, hunger and
disease were constant companions
- From year 1500 income rises a little but not much, people are still poor. Europe slightly
wealthier, income is 1.5times higher than the world
- Up until 1820, growth was predominantly extensive (i.e. the discovery and use of more
resources) but since then has been more intensive (better use of resources). By 1820,
life expectancy in Europe had risen to 36 but remained at 24 in the rest of the world.
- Starting from 1870, income rises substantially. Industrial revolution was about to cause
Western Europe in particular and some other countries to be ahead of everyone else
- Year 1913: Incomes in the West are 4.5 times higher than the rest of the world.
- Year 1950: Incomes are 5.5 times the rest of the world
- Year 2003: Every country has become wealthier compared to years ago In the past 1000 years, world population increased by a factor of 24, per capita income a factor
of 14. In the preceding 1000 years, world population grew by one sixth and per capita income
Europe Pre A.D. 476
- Until around A.D. 400 the Roman Empire dominated most of the continent of
Europe, the Middle East and North Africa.
- The slave economy was common.
- The military might of Rome provided law and order (stability) and allowed travel
and commerce to flourish. Trade was common throughout the empire and
facilitated by Roman coinage.
- The Roman Empire in the West fell in A.D. 476
Europe 476 – 1000 (the early Middle Ages)
- After the fall of the Roman Empire, Europe disintegrated.
- Pillaging was the common form of acquiring economic resources.
- Slavery became much less common and the masses became serfs (peasants)
rather than slaves.
- The feudal system was based around fiefdoms. Serfs were tied to the land (the
manor) and the land owner. Their surplus production went to their lord who in
turn provided protection to the peasants.
- Land was inherited (and the source of wealth) and rarely sold.
- Social and economic mobility was non existent. Life was rigidly hierarchical. Child
generally follow parents’ occupation.
- Trade was difficult and mostly confined to local areas. Trade was not common
because it was dangerous to trade.
- Sometimes called the “dark ages” though that’s probably a bit harsh.
Europe 1000 – 1400 (the late or high Middle Ages)
- By about A.D. 1050 conditions in Europe had stabilised for some trade and travel
- Towns and cities started to grow – independent of land based manors. [Town
and cities caused economic relationship to change. People can make money
independent of land. Eg: People can manufacture, specialize etc]
- The First Crusade in 1095. [Europeans encounter different culture]
- In 1200 the number “zero” arrives from the Middle East making negative number
- The Black Death (bubonic plague) 1348 – 1351 devastates Europe.
- The Roman Empire in the East fell in A.D. 1453 and gunpowder changed the
social, political and economic landscape for all time (known as the Byzantine
Empire and based in Constantinople – now Istanbul) Europe 1400 – 1700 (the late or high Middle Ages)
- The rise of the nation state occurs – 1400’s. [Developed from towns and cities]
- Columbus lands in America, 1492. Vasco De Gama rounds the Cape of Good
- Hope and reaches India, 1498. Trade (and colonisation) is under way. [Before
this event, the only way to trade was through silk road/spice road. Over-land
trade coming from the east (with China for example) is expensive. Discovery of
India opened up cheap way of trading through sea travel.]
- In 1517 Martin Luther (1483-1546) posts his 95 theses on the church door at
Wittenburg, Germany and the protestant reformation starts in earnest. The
“protestant work ethic” (particularly with Calvin (1509-64)) important in a
growing acceptance of commerce, trade and accumulation.
- Nation states start to see the benefits of trade – and the benefits of having the
power to control it.
Mercantilism 16th to
- The idea that the government should manage the economy for the purpose of
increasing national wealth and state power.
- Assumed that the wealth of the world was fixed so trade between nations meant
one winner and one loser. [In trade there is one loser and one winner. The one
who loses is the one who has to give up gold. The more gold accumulated, the
more power obtained.]
- Equated power and wealth with the accumulation of wealth (gold and silver)
rather than land (as in the feudal system). [Gold replaced land to become the
source of wealth].
- Hence government should
(1) stimulate domestic output [produce more to sell]
(2) limit domestic consumption [consume less domestically, export more for gold]
(3) put tariffs on imports [increase exports for more gold]
(4) try to create a positive trade balance (exports are “good” but imports
- Trade guilds were important as a way of “organising” the economy. [Free trade:
Trading without the permission of guild]
- Colonies were seen as an important way to acquire more resources and power
compared to other countries. [to gain unhabitated land/resources] [Spanish got
to America continent first. They chose South America for gold and silver]
- English and other European colonising nations policies were designed to keep
the colonies as exporters of raw materials and importers of manufactures.
- Industrial revolution starts in around 1780.
- Articulated the role of markets, individual liberty and governments. Smith was
able to reconcile self interest and public good.
- Attacked the mercantilists and asserted that countries should specialise in what
they do best and trade.
- Argued that it is not wealth that matters but what you can do with it - Division of labour leads to greater production both domestically and
- Introduced the idea of invisible hand
Baker’s example: A baker produces bread to gain income to support his family. In the
process, societies also benefit from the production of bread as they buy bread from the
baker. This is as if the baker is led by led by an invisible hand to promote an end which
was no part of his intention.
- Further attacked the mercantilists and the harsh “Corn Laws” in place in England
at the time.
- Corn Laws: When England was in war with Napoleon they did not import grain
from France. Price of grain in England rises. Wealthy land owners who grow
corns prefer high prices. They knew price will go down after war ends. Therefore,
wealthy land owners in parliament passed Corn Law to prohibit tax on imported
- This law was finally repealed in 1846.
- David Ricardo extended Smith’s absolute advantage to comparative advantage.
Thomas Robert Malthus
- Suggested that food production can