📚

All Subjects

🌍

AP World

🚀

Thematic Guides

Theme 4 (ECON) - Economic Systems

21 min read•november 23, 2021

Jennifer Dumas

Jordyn Haynes

Dylan Black

AP World History: Modern 🌍

577 resources

See Units

👉The one thing you need to know about this theme:

Economics develop a society. Food production, economic exchange, and the consumption of goods and services impact all the characteristics of an economy.

📘College Board Description

Society, as it develops, affects or is affected by what they produce, trade and consume.

🔍Organizing Question

How does exchanging goods, producing goods and consuming goods create or affect an economy for a society? How do people earn their food?

📝Key Vocabulary

Pastoralist	Agriculture	The Silk Road	Consumer
The Atlantic System	Encomienda System	Mercantilism	The Columbian Exchange
Trading Markets	Industrialization	Joint-Stock Companies	Market Economy
Capitalism	Communism	Great Depression	Globalization

Historical Examples

Units 1 & 2 (1200-1450)

The formation of a society in Unit 1 and Unit 2 of AP World History Modern relied heavily on the creation of an economic system. Societies found new ways to increase production capacity, expand trade networks, and create new innovations in agriculture and manufacturing that would greatly benefit them in the long run. The creation of trade networks led to an increase in human interactions within and across regions that contribute to cultural, technological, and biological diffusion throughout various societies.

The Effects of Innovation on the Chinese Economy

The economy of China began to become more developed under the Song Dynasty and was able to increase the commercialization while still relying on the use of peasants and free laborers.

The Chinese economy also experienced a period of flourishment due to an increase in production, the expansion of trading networks, and improvements in agriculture and technology.

Technological Innovations include:

Champa rice → Champa rice also led to population increases
Transportation innovations like the Grand Canal expansion
Steel and iron production
Textiles and porcelain for export

Trading Networks

The development of trading networks allowed for the transportation of new goods, ideas, beliefs, and practices, which collectively expanded global economies and enhanced all elements of society

🎥Watch: WHAP - CCOT Silk, Sea, and Sand Roads

The Silk Roads

The largest land-based trade network, the Silk Roads, was able to improve commercial practices and increase interregional trade. As well, the Silk Roads were able to expand the geographical range of pre-existing trade networks, which resulted in promoting the growth of powerful new trading cities.

Examples of key trading cities:

Kashgar
Samarkand
Calicut

Along this trade route came the development of transportation and commercial technologies, including the caravanserai, forms of credit, and the development of money economies. Paper money from China was known as flying money. This new monetary system changed how commerce was carried out for traders.

New forms of credit and money economies:

Bills of exchange
Banking houses
Use of paper money

Societies were also able to expand their economic market because the different items that they traded:

Chinese, Persian, and Indian artisans and merchants expanded textile and porcelain production for export
Chinese expanded manufacturing of iron & steel

Image courtesy of Weisun.org

Trans-Saharan Trade Network

Throughout the African continent, numerous trading cities rose and were able to foster and promote the beginning of an African economy. In East Africa, the state of Ethiopia continued to prevail as a trading city, as it conducted trade throughout the Indian Ocean Network.

The Hausa Kingdoms (Nigeria) and the Kingdom of Mali traded goods such as gold, animal products, slaves and salt across the Trans-Saharan Trade Network. Trade inventions such as the saddle led to the growth of large merchant groups called caravans. Economic developments in Africa contributed towards the growth of large trading cities in Africa similarly to Eurasia such as Timbuktu.

Image courtesy of World History Encyclopedia

The Indian Ocean Trade Network

Being the largest sea-based trade network, the Indian Ocean Trade Network, improved numerous economies and developed new transportation technologies, as well as commercial practices that increased trade. The growing attention to the Indian Ocean trade networks allowed empires to expand their geographical range into new territories, forming even more powerful new trading cities.

Also came new technologies for new economic purposes:

The compass
The astrolabe
Larger ship designs:

Arab dhows
Chinese junks

The Indian Ocean was able to foster growing states, such as city-states of the Swahili Coast, Gujarat, and the Sultanate of Malacca.

The growth of maritime trade shifted the world economy from one involving land trade to one that will grow into a seafaring trading society. This will greatly impact how trade in the next period carries out. Traders were driven by the monsoon winds, an example of how natural geography impacted trade during the post-classical era. The Indian Ocean allowed traders to accurately predict how navigation would follow. The Indian Ocean expanded the reach of empires such as Song China, the Abbasid Caliphate, and trading post empires such as the Majapahit and Khmer Empires.

Now that we’ve looked at how the world was connected, let’s have a look at the individual economies of the world.

Image courtesy of ThoughtCo

The Mongolian Expansion Effect on the Economy

The expansion of empires—including the Mongols—led to Afro-Eurasian trading and communication as new people assimilated into the conquerors’ economies and trade networks. The Mongols strengthened the safety and robustness of the Silk Roads by creating a unified empire across nearly all of Afro-Eurasia. The Pax Mongolica, or Mongolian peace, helped to grow the Silk Roads somewhat, but by 1450, the majority of the world’s trade was maritime.

Feudalism in Europe and Japan

Europe

Unlike the world economy in the later 18th and 19th centuries, Europe played a relatively small international role in trade. After the fall of the Roman Empire in 476 CE, the economy of the majority of Western Europe was in shambles. The unified empire that once was fractured into many different decentralized states that traded very little. Instead, the feudal system grew along with manorialism. The feudal system in Europe was a system by which peasants and serfs lived on the land of a lord as a vassal (lower class) and in exchange for some of their crops, the lord would provide security and land. This created a pyramidal social structure with interdependence as the key:

Image courtesy of Hunt the Past

However, there was some economic stimulation in Western Europe, mostly around Scandinavia in the form of guilds. Guilds were like modern day unions in that they brought together members of a specific craft to form trade and markets. The most well known guild during this time period was the Hanseatic League, which stretched through Scandinavia and Northeastern Europe.

Image Credit

Japan

Similarly to Europe, Japan employed a feudal system made up of smaller states all controlled by two main people: the emperor and the shogun. What the difference is between an emperor and shogun is in who has power. In reality, the shogun is the main power holder in Japan, the role being a military warlord. Minamoto Yoritomo was the first shogun. The emperor, by contrast, served as almost exclusively a figurehead, not holding any real power. Here is a pyramid to show this, you may see some similarities between Europe and Japan:

Image Credit

Growth of Trade in the Americas

During the first two units, the Americas grew in such a fashion that three main states rose: the Aztecs, Incan Empire, and the Mayan Empire. Unlike the Aztecs and Incas, the Mayans had been in Guatemala since nearly the times of the Roman Empire. However, the post-classical era led to new developments in American trade and communication. While the Americas were still isolated from the rest of Afro-Eurasia, trade routes began to grow between the major empires in Middle and Southern America. This, and inventions such as the quipu, a series of knots that were used as a writing system, allowed for interregional trade to thrive in the region.

Food production was also innovated in the American empires, such as the use of chinampas and terrace farming by the Aztecs and Incans respectively.

Image Courtesy of Silver

The Aztecs employed a system known as the tribute system, similar to the Tang and Song imperial tribute system. This allowed the Aztecs to gain money from conquered lands.

In labor, the Incans had a mit’a system, in which able bodied men were required to do work for the Incan government for two years. This will be adapted into the mit’a system under the Spanish and Portuguese empires in the next time period.

Units 3 & 4 (1450-1750)

Much of Unit 3 and Unit 4 in AP World History: Modern focuses on the expansion of existing empires.

Empire Expansion on the Economy

The expansion of empires relied on the use of gunpowder, cannons and other armed technologies that was dependent on the trade of resources from one area to another. Without the trading of these military technologies there would not be such existence of imperial expansion.

Empire Administration on the Economy

Empires often found various ways to monetize the production of goods and services on their people. Many of these ways involved taxation that will become prevalent in upcoming societies. Imperial rules used tax-farming, innovative tax collecting, and tribute systems to generate more revenue for expansion.

Tax-collection systems:

Mughal zamindar tax collection
Ottoman tax farming
Mexica tribute lists
Ming practice of collecting taxes in hard currency

Global Network of Exchange

During this period of time, because of the new global circulation of goods, there was a collapse in existing trade routes that led to the formation of transoceanic interconnections that conducted a more active trade. This collapse, momentarily, disrupted governments and economic prosperity for merchants.

Due to European invention of navigation and cartography, economies were able to prosper off the discovery of new societies and interactions. Along with the understanding in wind patterns enhanced the economy.

Effects of Maritime Exploration on the Economy

The Portuguese development of maritime technology and navigational skills allowed for the increase in travel to and trade with Africa and Asia.

Spanish voyages dealt with Christopher Columbus and later travels across the Atlantic and Pacific that increased European interest in transoceanic travel and trade.

Northern Atlantic crossings were now under English, French, and Dutch sponsorship, often with the goal of finding faster alternative sailing routes to Asia.

European endorsement of monopoly companies caused a new global circulation of goods. These monopoly companies purchased Asian goods for Atlantic markets, but regional markets of Afro-Eurasia still flourished because of commercialization and new transoceanic services of merchants.

Merchants conducted a process called mercantilism- also known as “commercialization,” it is an economic theory that promoted governmental regulation of a nation's economy normally carried out by merchants. Mercantilism also hailed the idea that a country’s exports should be larger than its imports, creating a trade surplus.

The concept of mercantilism influenced what was known as a joint-stock company. Joint-Stock companies helped European rulers to control domestic and colonial economies. These companies such as the Dutch East India Company were the forerunners to modern corporations.

How Did Joint-Stock Companies Work?

Many AP World students get tripped up as to what exactly a Joint-Stock Company is. Well, Fiveable is here to help! Joint-Stock Companies were essentially the first form of crowdfunding.

Think about an expensive voyage. If you sink a million dollars into an expedition and then it goes under, you’ve just lost all of your money! However, now what if 10 people each pay 10% of the money and then split the profits 10% each? Now, while yes, you are making less money than you may if you had funded the voyage 100%, you now can:

A. share resources more efficiently

B. allocate risk more carefully and invest in lots of things at once.

Joint-Stock companies quickly grew to power. In fact, the British East India Company was so large that it had its own army and large amounts of territory in South Asia!

Joint Stock companies grew all over the world and contributed towards the economic development of the 15th through 18th centuries by globalizing the economy and allowing for growth in capital and investment.

Image Courtesy of Raju

Silver: The First Global Commodity

Because of globalization, a good emerged that fueled the economic and monetary foundations of the world for the next 300 years: silver. As trade routes grew across continents and oceans and trade was consolidated among large areas, silver spread like wildfire, becoming known as the world’s first global commodity. Silver was a major good traded from the Americas, such as in the Potosi Silver Mine in South America. In this trade system, China was the primary importer of silver, and Spain and other European countries served as a middleman to get them the silver along with using silver themselves.

However, the globalization of silver did not come without its negative effects. The huge influx of silver caused massive inflation in China and in Spain, raising prices due to the price of silver dropping dramatically. A decrease in the price of silver led to silver being worth less when used as currency and thus, prices rose. This is known as the Price Revolution.

According to Charles C. Mann, “A significant hunk of the GDP of China – then the world’s biggest economy – was surrendered in order to secure a white metal that was produced mostly in Spanish America and Japan.”

🎥Watch: WHAP - Silver Trade DBQ Practice

The Isolationist Economies of China and Japan

In China and Japan, the primary form of economics was isolationism. Under the Ming Dynasty in China and the newly formed Tokugawa Shogunate in Japan, Asia essentially closed down their economies for the majority of this time period.

Japan closed much more harshly than China. After taking power, Tokugawa Ieyasu closed down all trade between Japan and any country other than the Netherlands. Even then, the Netherlands could only trade at the port of Nagasaki.

Similarly, China began to isolate themselves from the globalizing economy and focus inwardly. Isolationism allowed China to defend themselves against the nomadic invaders that constantly throughout history, have been knocking on their doors (or walls).

However, Chinese exploration prior to isolationism was strong! The most famous example, Zheng He, was a well known traveler who voyaged around Southeast Asia but was stopped in 1433. This hurt China from expanding their economy outside of their borders, something that will hurt them in the long run.

Image Courtesy of Quora

The Columbian Exchange

The Columbian Exchange involved both connections between the Eastern and Western hemisphere. The main motivations for the Columbian Exchange can be described with three words: God, Gold, and Glory.

Because of the growth of Protestantism in Europe and the already religiously powerful church present in Europe, Europeans travelled to the Americas to proselytize, or spread their religion. Europeans also sought out new trade opportunities due to the newly formed Ottoman Empire blocking their way through eastern trade routes.

Because of European colonization of the Americas, it led to the exchange of epidemic diseases from the Eastern Hemisphere to the American population such as smallpox. The American foods became staple crops in Europe, Asia and Africa.

There were also plants known as cash crops, that transformed the American market because it produced these crops in abundance, and made European colonizers massively wealthy. Cash crops such as sugar and eventually tobacco were mainly produced on plantations with coerced labor and exported mainly to Europe.

Image Credit

The Continuities and Changes in Economic Systems and Labor Systems

Although European exploration and colonization primarily dominated the economic systems in this time period, existing trade networks in the Indian Ocean continued to flourish and incorporated inner- Asian trade and Asian merchants.

Indian Ocean Asian merchants:

Swahili Arabs
Omanis
Gujaratis
Javanese

The development of colonial economies were economically prosperous for Europeans as it gained them a substantive amount of wealth. The markets of the Americas demanded the production of agricultural crops, specifically cash crops. The American economies utilized labor systems, such as Incan mit’a, chattel slavery, indentured servitude, and encomienda and hacienda systems.

The Economy of the Slave Trade

Most, if not all students learn about the slave trade in their history classes early in high school if not before. However, the slave trade was not as simple as Europeans buying Africans and shipping them across the Atlantic. In fact, many economies in Africa, such as Dahomey and Ashanti were affected by invasions by Europeans and Africans alike in order to obtain slaves to sell.

The selling of slaves mainly took place between West African states and European powers to be sent to the Americas. Along with the Columbian Exchange, the growth of the slave economy created the triangular trade between the Americas, Europe, and Africa:

Image Credit

The Continuities and Changes in Networks of Exchange

The globalization of trade and further growth of maritime trade from the previous time period led to increasing change in networks of exchange in the period 1450 - 1750. Knowledge, scientific learning, and technology from the Classical, Islamic, and Asian worlds spread, facilitating European technological developments and innovation.

This growth in interaction between Europe and the rest of Afro-Eurasia led to the implementation of maritime trade in Western Europe and the expansion of the European economy into Asia and the Americas. Outside of trade, labor systems also saw great change, with new labor systems coming into existence such as the m’ita and encomienda systems and some others, like chattel slavery and indentured servitude along with serfdom (which was prevalent in mainly Russia at this point), expanded and evolved into new forms.

Units 5 & 6 (1750-1900)

This time period focuses heavily on the concept of Industrialization. Industrialization has massively impacted economies across the globe.

The Industrialized Economy

Industrialization caused a fundamental change in the production of goods. There were many factors that led to the rise of a newly industrialized economy.

Factors include:

Improved agricultural productivity
Accumulation of capital (resources that produce, such as land, labor, and machinery)
Urbanization - the growth of cities led to the growth of factories
Demographic changes
Exportation of foreign resources

Industrialization fostered the growth of new forms of production, most notably in the founding of factories and mills alongside rivers. Note that we are not talking about oil power or electricity just yet, we are rather talking about steam power. Watt’s steam engine in 1776 brought new industrial potential to countries which previously couldn’t grow economically.

The First Industrial Revolution brought with it the Market Revolution, in which the previous Cottage Industry in which people made homemade goods to sell ended and factories and mills took over. Note that these factories were NOT gas or electricity powered, but rather powered through steam. Therefore, rivers and natural waterways were paramount in forming an industrialized nation (making places like Africa difficult to industrialize without a coast).

Industrialization began in England (mainly due to early access to the above factors) and spread through Europe and then across continental borders from there. Although industrialization mainly took hold in Europe and the Americas, its effects were worldwide.

To incorporate investments of all levels, financiers began to expand and enhance numerous financial institutions.

The process Industrialization led Western European countries to begin to abandon the idea of mercantilism and adopt free trading policies because this would boost economic revenue. This was due to Adam Smith’s policy of laissez-faire capitalism, free markets and classical liberalism outlined in his book The Wealth of Nations.

Other economic theories such as utilitarianism were developed. The adoption of laissez-faire allowed for global trade and production and further integration into the global economy as raw materials & new markets increased the production of goods.

However, there were challenges to the growing capitalism and market based economy of the 19th century, such as Marxism, formally created in 1848 by Karl Marx’s The Communist Manifesto, and socialism, in which the means of production is returned to the workers, not to managers and higher ups, and people live communally, sharing wealth.

The formation of this new global economy, global trade, and global production led to the proliferation of large-scale transnational businesses.

Transnational Businesses:

Hong Kong and Shanghai Banking Corporation (HSBC)

Unilever based in England and the Netherlands and operating in British West Africa and the Belgian Congo

The United Fruit Company

The United Fruit Company will come up again in our discussion of economic imperialism

The development of industrial capitalism led to the proliferation of standards of living (only for some), and constant improvements in manufacturing that allowed for affordability, availability, and wide- variety of consumer goods.

Financial instruments:

Stock markets
Limited-liability corporations

the owners are not personally liable for the company's debts or liabilities (thus, there is limited-liability)

Large scale banking

The Consequences of an Industrialized Economy

The demand for raw materials in factories increased the population of urban areas and transformed non-industrialized economies into export economies, economies that are subsistent on exporting raw goods to industrialized countries.

For example:

Cotton production in Egypt
Rubber extraction in the Amazon and the Congo basin
The palm oil trade in West Africa
The guano industries in Peru and Chile
Meat from Argentina and Uruguay
Diamonds from Africa
Something to note - many of these places were later taken over due to empire building in the 19th century

Socioeconomic structures also grew due to migrations that took place:

Migrants:

Irish to the United States
British engineers and geologists to South Asia and Africa
Italians and Germans to the United States
Chinese to the United States
Italians to Argentina
Many, many, MANY others

The new global capitalist economy continued to rely on coerced and semi coerced labor migration, including slavery, Chinese and Indian indentured servitude, and convict labor

Industrialization Outside of Europe

However, industrialization did not just occur in Europe. Major industrialization efforts were made in Japan, following the Meiji Restoration, and in Russia under Sergei Witte and the building of the Siberian Railroad.

In Japan, industrialization efforts were taken into effect after the Tokugawa Shogunate fell, causing the reinstatement of the Japanese emperor. This emperor, Emperor Meiji, implemented Westernization programs similar to that under Peter the Great in Russia in the 1700s. This westernization also led to the growth of the Japanese Empire and the imperialism that would eventually cause WWII in Asia.

In Russia, industrialization took its form in steel manufacturing and the growth of railroads.

Imperialism and its Effects

During this time period, nations began expanding their economies and political boundaries through the process of imperialism. While territorial imperialism is more of a political discussion, the economic motives are very clear. The major cause for European imperialism, especially in Africa and India, was for two things: Markets and Materials (M&Ms).

In imperializing, industrial nations wanted one thing: money. In world history, frankly, it always comes down to money. Imperializers wanted to expand their empires in order to open up access to trade with other countries in otherwise unreachable or hard to reach areas to trade with, and they wanted to gain access to raw materials like cotton, rubber, and oil.

Along with territorial imperialism, economic imperialism was also a feature of the 1800s. Economic Imperialism is the economic domination of one nation by another and from 1750-1900, it was a recurring theme. Mainly in Asia and Latin America, industrialized states and businesses practiced this concept of economic imperialism.

Industrialized states practicing economic imperialism

Britain and France expanding their influence in China through the Opium Wars and the building of the Suez Canal
The construction of the Port of Buenos Aires with the support of British firms
The growth of international corporations such as the United Fruit Company, that were so powerful that they created what were known as Banana Republics
In Asia, economic imperialism took form in spheres of influence, in which following the Opium Wars, countries could take control of a small part of China in order to gain trade. This led to the Taiping and Boxer Rebellions in the late 19th century.

Structural trading in this era also gave merchants and governments economic benefits that would put them ahead on the global economy.

Commodities that contributed to European and American economic advantage: Cotton grown in South Asia and Egypt and exported to Great Britain and other European countries
Palm oil produced in sub-Saharan Africa and exported to European countries
Copper extracted in Chile

The new global capitalist economy still relied heavily on coerced or semi-coerced labor migrations including slavery, Chinese and Indian indentured servitude, and convict labor.

Units 7, 8, & 9 (1900-Present)

World War I: The War to End All Wars

After the assassination of the Archduke Franz Ferdinand by Gavrilo Princip in 1914, the world was thrust into war. However, unlike previous wars, World War I involved not only the direct countries that had declared war, but also their colonies. This led to a regional conflict becoming the biggest war that mankind had ever seen.

Economically, World War I influenced war economies to develop, in which nations took their entire economy and transformed it into a machine to produce goods for war like guns, tanks, ammo, etc. After the war, the most important economic event was the Treaty of Versailles, which placed heavy war reparations on Germany, leading to massive inflation and the rise of the Nazi Party.

The World Economy Economy in the Interwar

The Great Depression

The Great Depression began in 1929, following a massive stock market crash in the United States which caused a chain reaction internationally because of growing interconnections between international economies.

The Great Depression was the worst economic collapse that the world had ever seen and, along with already existing economic troubles in Europe because of WWI, the world changed dramatically

Following World War I and the tragic Great Depression, governments become more proactive in the economics of their countries.

Government intervention in the economy:

The New Deal → Government supported welfare
The fascist corporatist economy
Governments with strong popular support in Brazil and Mexico

In the Soviet Union, the government monitored the national economy through Stalin’s Five Year Plans, generally through the implementation of oppressive policies, with negative consequences on the population such as famines. Stalin’s Five Year Plans involved collectivizing land and taking land away from kulaks, upper middle class peasants. However, these plans also involved a totalitarian government and limited freedom of speech and press.

Effect of Communism on the Economy

Due to internal affairs and Japanese inference, Chinese communists led by Mao Zedong seized power in 1949 in the Chinese Communist Revolution. In this communist China, the government enforced the Great Leap Forward, aimed to rapidly transform the country from an agrarian economy into a socialist society through rapid industrialization and collectivization), which they generally implemented oppressive policies, with negative consequences on the population.

Image Credit

Economics and Globalization

During the latter half of the 20th century, the name of the game in economics was globalization. As technology and transportation connected the world, trade and international economics reigned supreme over isolationist economics. The first truly multinational corporations like Nike and McDonald’s (you may see this topic referred to as McDonaldization) rose to prominence, cementing the fact that there was no such thing as an isolated nation anymore.

World economic agreements, like the World Bank, World Trade Organization (WTO), North American Free Trade Agreement (NAFTA), Association of Southeast Asian Nations (ASEAN) along with monetary policies such as those developed in the Bretton Woods Conference in 1944.

A global economic split known as the Global South also began to occur, in which northern countries such as those in America and Western Europe began to move past those in the southern hemisphere such as Africa, South America, and Asia.

The major reason why these areas had trouble catching up with the north is due to the fact that they were previously imperial colonies of Europe and the United States, leading to economic crises when they decolonized.

These areas became prime targets for multinational corporations to create cheap labor sweatshops for production, an issue that is still occurring in the present day. These companies use the Global South because of the lack of minimum wages and labor laws, meaning they don’t have to pay as much to produce.

After the end of the Cold War, a trend of encouraging free-market policies arose, as well as the promotion of promoted economic liberalization.

Governments’ increased encouragement of free-market policies:

The United States under Ronald Reagan
Britain under Margaret Thatcher
China under Deng Xiaoping
Chile under Augusto Pinochet

In the 21st century, the world is connected through the Internet, which facilitates much of the world’s economic activity. Globalization continues to fuel and interconnect every person on the globe and only time will tell what the world economy will look like in even 5 years.