INTRODUCTION: LONG-RUN TRENDS
This chapter provides a brief introduction to the history of Britain's engagement with the international economy between 1870 and 2010. It begins by discussing long-run trends in the integration of the British economy with the rest of the world. Economic historians are typically interested in four types of flows between economies: trade in goods and services; flows of capital; migration flows; and flows of ideas and technology. The last flow is probably the most important one for countries hoping to catch up to the international technological frontier. While this was not the right way to characterise the British economy in 1870, it probably was at various points after the Second World War. Unfortunately, such flows are also the most difficult to quantify, and so I follow the bulk of the literature in concentrating on trade, capital flows and migration.
When measuring the extent to which commodity, capital or labour markets are integrated at various points in time, researchers have adopted several approaches. The most straightforward is simply to measure the extent of trade, or capital flows, or labour flows, and see how these vary over time. In order for intertemporal comparisons to be meaningful, it is common to express the flows as a percentage of GDP, or relative to the total population, as appropriate. Another approach is to focus on the costs of transacting internationally, which will be reflected in price gaps for a homogeneous commodity, or financial asset, or type of labour, between two markets. Falling international price gaps are a sign that markets are becoming better integrated over time, rising price gaps a sign of disintegration.
It is possible that prices could converge internationally for reasons having nothing to do with trade, while trade can increase for reasons other than the integration of international markets. If, however, price gaps converge at a time of falling transport costs, trade liberalisation, and/or rising volumes of trade, then it seems safe to conclude that integration is taking place.