A. Technological change. During the Transition Period, technological advances were concentrated in transportation and communications.B. Diffusion of British technology.Transition Period saw diffusion of British tech developed during 1st IR. Some of it happened earlier, despite British attempts to restrict the export of technology.1. William Cockerill, mechanic from Leeds woolen industry, migrated to Belgium in 1799 and starts shop for construction of spinning machinery.The Transition PeriodI. The Free Trade Era in Europe. During the mercantilist era, trade was seen as a zero-sum game: one country’s gain was another country’s loss. If Spain imported more from England that she exported to England, she had to send specie to Englandto make up the difference. In the mercantilist view, this was viewed as a lossfor Spain and a gain for England. So, countries established policies to encouragefavorable trade balances: they subsidized export industries and restricted imports through tariffs and quotas.The foundation of modern trade theory though was provided by David Ricardo (1772-1823) in his Principles of Political Economy (1819).A. Ricardo and comparative advantage.He argued that there were mutual benefits to trade, rather than the exporter “winning” and the importer “losing” Suppose there are only two countries, Portugal and England and two goods, wine and corn. The following table provides the yield per acre for each good in each country:Portugal EnglandWine 30 jugs 15 jugsCorn 60 bushels 45 bushels1. Portugal can produce more of both goods per acre than can England. So Portugal has the absolute advantage in both goods: for a given amount of inputs, Portugal can achieve higher output in wine (or corn) than can England. 2. Comparative advantage is determined by the “price” of one good in terms of the other good within each country. If Portugaluses an acre of land to plant grapes to produce wine, it gives up the opportunity to grow corn on that acre. So essentially Portugal is giving up 60 bushels of corn to get 30 jugs of wine. The “price” of a jug of wine is the 2 bushels of corn(60/30). In England, 1 acre allocated to wine production yields 15 jugs of wine at a cost of 45 bushels of corn. So comparatively, it is cheaper to produce a jug of wine in Portugal than in England. Therefore, Portugal has the Comparative advantage in wine production: Opportunity costs:Wine (in Corn) Corn (in Wine)Portugal 60b/30=2b 30j/60=1/2England 45b/15=3b 15j/45=1/3Portugal incurs a lower opportunity cost producing wine; England a lower opportunity cost producing, so England has the comparative advantage in producing Corn. 3. Law of comparative advantage:A country in its trade with anothercountry will export the good at which it has a comparative advantage in producing and importthe good in which it has a comparative disadvantage in producing. By trading along the lines of comparative advantage, both countries can experience gains. So by trading with each other, both countries are able to push out their consumption frontiers. The aggregate consumption of both goods can increase. (Graph)Trading 2.5 bushels of corn for a jug of wine and specializing.Portugal makes 30 jugs of wine, trades away 15, and gets 2.5 bushels per jug.Versus autarky (the absence of trade), Portugal and England can consumemore wine and/or more corn if theyspecialize along the lines of comparative advantage and trade.B. Where does a country’s comparative advantage come from? It’s rather straightforward in terms of agricultural production. Some climates are good forgrapes, some for corn, others for cotton, coffee, etc. But, how to explain the comparative advantage in manufactured goods? 1. Technology differences.CA may come from differences in technology in different countries. The problem is that technology is easily transferred from country to country, this advantage would disappear as technology diffused.2. Hecksher-Ohlin theory of comparative advantage. Two Swedish economists, Hecksher and Ohlin writing in the 1940s proposedan alternative theory. They assumed that every country had access to the same technology. However, factors of production cannot move easily across national boundaries and so cannot be used in the proportions needed to maximize productivity. The relativescarcity of productive inputs differsfrom region to region and from country to country. For example consider the differences in Britain and the U.S. In the 19th century. Britain had a relative abundance in labor and scarcity in land. In the U.S. they had a lot of land, but relatively little labor. Hecksher- Ohlin theory predicts the U.S. Would specialize in goods that useda lot of land with little labor: wheat and corn. Britain on the other hand would specialized in cotton cloth and other manufactured goods as their cheap labor could go into factories.This theory has some weakness. It doesn’t always yield clear predictions for the direction of trade. In addition, it is not completely true that factors of production cannot move across national boundaries. But, it does provide some insight into trade flows ofthe 19th century and even today.C. Is everyone made better off by trade?Ricardo’s model showed that a country’s aggregate consumption can increase w/ trade. This doesn’t mean that every individual benefits equally, some lose with free trade. Again, imagine Englandand Portugal start from autarky (no trade). When trade begins, the wine producers in England and the corn producers in Portugal lose; but corn producers in England and the wine producer in Portugal win. The sum of the benefits is positive but the benefits are not evenly distributed across individuals.D. The rise of free trade policies in Europe. Despite the logic of Ricardo’s argument, Britain and other European countries did not rush to abolish protectionist trade policy. The end of protection and the rise of free trade required shifts in opinions and power. This is where there is a relationship between the Industrial Revolution and trade policy changes: those who promoted free trade policy were manufacturers and industrialists. In Britain, the names associated with the abolition of protectionist policy were Richard Cobden and Robert Peel.Richard Cobden was an industrialist from Manchester; Robert Peel was the son of a textile manufacturer.  The rise to power of groups that directly benefited from free