midterm #1 review

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CHAPTER
2
Midterm Review
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Midterm #1
Multiple choice- bring a scantron and pencil
(Supply/Demand)
Chapter 2
Chapters 3-5 (selected topics)
Chapters 6-9
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Chapter 2: Some Key Topics
 Colonization of North America vs South America:
differences?
 economies of scale, sugar production
 Jamestown (1607), Plymouth Colony (1620), property rights
 Tragedy of the commons
 Indentured servants
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Colonization in North and South America
All of the Americas were colonized by
European powers
Outcomes are different in North and South
America
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Sugar Production and Economies of scale
Sugar production has large economies of
scale
Large plantations with hundreds of slaves
Large capital requirements
Economies of scale:
the cost of production decrease as firm size
increases
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Jamestown, 1607
First permanent settlement is Jamestown in
1607
Colony operated as a collective unit with all
work and output shared.
Farmers did not have incentive to work hard
because all output was shared.
Lack of property rights.
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“Tragedy of the Commons”
Common ownership has two characteristics
Compensation is average of what is produced
No one has right to exclude people from using
resources
Result is common property will be used until
its value is zero.
Example: sheep grazing on common land
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Bringing in Settlers
By 1775, more than 500,000 Europeans had
made the transatlantic voyage to North America.
Approximately 70% of these settlers came
over via the use an indenture contract.
The Problem: The cost of a transatlantic voyage is
too high for the average laborer.
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Indenture Contracts
• Made between immigrant and shipper
• Worker agreed to work a set number of years to
pay the cost of transport to the colonies.
• When ship landed in colony, shippers would sell
the contract to merchant or business owner
compensating him for the cost of voyage.
• Many indentured servants have skills and are
literate
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What went wrong in Jamestown?
What let to differences in equality in the
Societies in South America vs North America?
What is meant by economies of Scale?
Where was sugar produced?
Why did indentured servitude end?
Why did people continue to move from
Europe to the Colonies?
Compare the standard of living in the colonies
to England. Why were they different?
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Chapters 3-5: Some Key Topics
Mercantilism
Navigation Acts
Specie
Money in the early colonies
Commodity money
Paper Money
Fiat money
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Mercantilism
The Mercantile System or “Mercantilism”
dominated European doctrine and institutions
from 1500-1800.
The primary aim of Mercantilism is to gain power
for the state through the accumulation of gold
and silver through trade.
By accumulating gold and silver, a country would
become wealthy and could finance wars and
conquests.
Maximize Exports, Minimize Imports
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The Navigation Acts
In order to control the flow of goods, the
English passed the Navigation Acts in 1651.
1) All trade of the colonies was to be carried in English
built ships with a crew at least ¾ English. (Importantly,
colonists were considered “English” under law.
2) All foreign merchants were excluded from trading
directly with the colonies.
3) Certain commodities (“enumerated goods”) could be
exported only to England.
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Money in the Early Colonies
 Money eliminates the need for a barter economy and
makes economic transactions much more efficient.
 Wampum was considered legal tender in Massachusetts until 1661
 In Virginia, tobacco notes were part of the money supply.
 By the 18th century both specie (gold and silver coins) and paper
currency were commonly used in the colonies.
 English coins could not be legally exported to the colonies (remember
Mercantilism), so Spanish silver coins known as “dollars” were the
most commonly used.
 Massachusetts minted coins in 1652 and paper currency in 1690. The
other colonies minted their own coins and issued paper currency in
later years. Paper notes were also issued by banks in the period.
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What is mercantilism?
What were the goals of the Navigation Acts?
What are all the different forms of money used
in the colonies and what are the economic
terms associated with theses different types of
money?
How did the idea of mercantilism shape the
colonial period?
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Chapter 6: Some Key Topics
 Impact of Navigation Acts on prices (supply/demand graph)
 Prohibition on Manufacturing
 Comparative Advantage
 French and Indian War (1754-1763)
 Proclamation Line of 1763
 Sugar Act (1764), Stamp Act (1765), Townshend Acts (1767)
 Tea Act (1773)
 Boston Tea Party
 Intolerable Acts (1774)
 Continental Congress (1774)
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The Supply and Demand Effects of the
Navigation Acts
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Prohibition of Manufacturing
England made it illegal to export colonial
manufactured products to any foreign
countries or even other colonies.
England wanted to protect it manufacturing
industries.
Was this necessary? –No. England had a
comparative advantage in manufacturing and
could compete with the colonies without
protection.
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Comparative Advantage
A country has a comparative advantage in
producing a product if it can produce the
product at a lower relative cost than other
countries.
Countries should produce and export products for
which they have a comparative advantage. They
can then import products that they are not good at
producing.
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Comparative Advantage
The Colonies had a comparative advantage in
producing many agricultural products due to
the availability of land and in producing natural
resources such as wood.
England had a comparative advantage in
manufactured goods due to an abundance of
skilled craftsmen, machines and technology.
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Outline of Events:
• French Indian War (1754-1763)
• Expensive, England need to raise money
• Sugar Act, Stamp Act, Townshend Acts (1764-1767)
• New taxes to raise money from the colonists to pay for
their defense
• Result: Most taxes lifted after a boycott of English goods.
• Tea Act (1773)
• Leads to Boston Tea Party
• Intolerable Acts (1774)
• Leads to Revolutionary War
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Proclamation Line of 1763
– The Proclamation of 1763 and the Quebec Act
of 1774 forbid colonists to settle in the west or
trade with the Indians without the permission of
the British government.
• maintain British control of the fur trade in the West
• Reduce conflict with native Americans and reduce
British defense expenditures
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Declaration of Independence
• The Continental Congress meets in 1774 and
presents demands the repeal of all major laws
imposed on the colonies after 1763.
• Fighting starts in 1775 and independence is
declared in 1776.
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How did the Navigation acts impact markets
for imported goods in the Colonies? Draw a
supply and demand graph.
What was the Proclamation line of 1763?
Why did England tax the colonies?
Did the prohibition on manufacturing actually
make much of a difference?
Why did the colonists fight for independence?
What was the French-Indian war?
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Chapter 7: Some Key Topics
Continental Currency, inflation
Price Controls
Articles of Confederation
Public Goods
Common Resources
Free-rider problem
Constitutional Convention
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Economic Impact of Revolutionary
War
• After the Revolutionary War, the US
economy stagnates.
• We are cut off from international trade and this
causes major sectors of our economy to suffer.
• Loss of gains from trade.
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Financing of Revolutionary War
Continental Congress does not have a lot of
power. Limited ability to tax.
Price controls. Set maximum price farmers
could charge Continental army.
The result is that there are shortages. Farmers
do not want to produce goods and sell them if they
cannot charge a fair market price.
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Printing Money
Between 1775 and 1781, the war was financed
not through taxes, but by printing lots of
money.
$200 million in Continental Currency
$150 million in quartermaster certificates
$200 million by the states
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Articles of Confederation replace
Continental Congress in 1781.
• Articles of Confederation:
• Too weak to perform the proper role of
government.
• Federal government does not have power to tax. It
depends on revenue sharing with states.
• To impose tariff needed approval of all 13 states
• Could not police frontier or resolve international trade
issues
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Public Goods
Public goods are difficult for private markets to
provide because of the free-rider problem.
Free rider: a person who receives the benefit of a good
but avoids paying for it If good is not excludable, people
have incentive to be free riders, because firms cannot
prevent non-payers from consuming the good.
 Result:
 The good is not produced, even if buyers collectively value the good
higher than the cost of providing it.
 If the benefit of a public good exceeds the cost of providing it, the
government should provide the good and pay for it with a tax on
people who benefit.
31
PUBLIC
GOODS
AND
COMMON
RESOURCES
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Learning. All Rights
Reserved.
May not be copied, scanned,
or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
Common Resources
Non excludable, rival in consumption
Role of government: regulate the resource so it
Is not overused.
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Constitutional Convention
Constitutional Convention of 1787
Delegates were appointed by state governments
who were elected by voters
wide variety of economic interests
Establishes a precedent that conflict would be
resolved through democratic process rather than
violence
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What is the difference between a Public good
and a Common Resource? What is the
government’s role in each case?
How did the US pay for the Revoltionary war?
What was the result?
What problems existed with the Articles of
Confederation?
How did the price controls imposed during the
revolutionary war impact the army? Show
what happens using a supply-demand graph.
What is meant by the term free-rider?
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Chapter 8: Some Key Topics
Conservative/Liberal Land Policies
Northwest Land Ordinance of 1785
Northwest Ordinance of 1787
Homesteading Act
Cotton
The pattern of US economic growth from
1800-1860
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Different Policy Views
Conservative Policy:
favored selling the land in large tracts for high
prices.
The government land should be a significant
source of government revenue.
Liberal Policy:
favored making land available to all by selling
small lots cheaply and even on credit.
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Northwest Land Ordinance of 1785
Reflected the conservative view that public
land should be a major source of revenue.
The smallest unit available would be one
square mile (640 acres) and sold at a minimum
price of $1/acre. The smallest purchase would
therefore cost $640; too expensive for the
average citizen and too large an area to
farm.
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Northwest Ordinance of 1787
Settled the political question of what would
become of the new lands to the west.
The new territories would be admitted to
the Union with equal standing to the
original states once they had at least 60,000
residents- social and political equality
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Later Land Acts
Later land acts lowered the price of land
and made the minimum purchase size
smaller and smaller.
By 1820, the minimum purchase was down to
80 acres by 1832 had been reduced to 40 acres
at a total price of $50 (or less). Land was now
accessible to the average citizen.
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Homestead Act
Political pressure grew for Congress to pass a
Homestead law
(160 acre farms to be given away at low cost).
The North was in favor of the Homestead Act.
Promoted settlement by individual farmers which would
lead to free states.
The South was against Homesteading.
160 acre farms would not support the economies of scale
necessary for cotton plantations.
The new farmers would not be in favor of slavery and antislavery political power would grow.
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Why is land settled at this time?
Reduction in transport costs (chapter 9)
Even before Louisiana Purchase there is a lot of
unsettled land within the US territorial boundaries
Migration to those areas does not occur
until transportation costs are low enough
that output can be moved to market.
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Cotton
Cotton becomes the dominant crop in the south
and spreads westward through Alabama,
Mississippi and Louisiana, into Texas.
Slavery spreads with cotton production as the large
plantation style of agriculture and economies of scale are
employed.
By 1860, cotton accounts for more than 50% of the total
value of US exports.
Cotton goods were the leading manufactured product of the
United States.
At one point, the South was producing 75% of the world’s
cotton.
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product or service or otherwise on a password-protected website for classroom use.
What were the Northwest Land Ordinances of
1785 and 1787?
What was the Homesteading Act? Why did the
South oppose this act?
What change caused a big increase in the
demand for cotton? What change caused a big
increase in supply? Draw the supply/demand
curves.
What is conservative land policy? Liberal land
policy? Which did the US follow in the late
1700s? Mid 1800s?
What was the general pattern of US economic
growth from 1780-1860?
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Chapter 9: Key Terms/Topics
Turnpikes
Canals
Steamships
Railroads
Are transportation methods Public Goods? Should the
Government pay for them?
Reduction in price differences across the United
States
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Transportation 1800-1860
Between 1800 and 1860 there are a number of
new transportation methods developed:
Canals
Steamships
Railroads
The improvements were so dramatic, that they
are often described as a “transportation
revolution”
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Reduction in Transportation Costs
Inland Freight Rates, 1784–1900
Turnpikes and
road buildings
Steamships
Eliminate
difference
between
upstream and
downstream
rates
Railroads
more
important after
Civil War
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Turnpikes (1790-1830)
Turnpikes were toll roads built by private
companies (toll roads with spears or pikes
used as gates)
Pennsylvania charters 86 companies that build
2000 miles of road. By 1811, New York has 1500
miles of road.
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Canals (1815-1860)
Shipping products in this time period is
accomplished almost exclusively by boat.
Canal building starts in 1815 with the Erie canal.
Some canals (such as the Erie) are very
successful. Most lose money.
Between 1815-1860 almost $100 million is spent on
canal building- 2/3 to ¾ by the government (mainly
state and local governments).
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Steamships
Prior to the steamship, goods and people
traveled downstream on rafts and flatboats
and travelled upstream by horse or wagon.
In 1807, Robert Fulton built the commercially
successful steamboat in North America.
Running on steam power, the boat can
travel upstream. This revolutionizes river
travel.
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Railroads
By 1860 there are nearly 30,000 miles of railroad
connecting all states east of the Mississippi.
However, a much greater volume of goods is still
transported by water.
Still less expensive to ship products by water than by
Railroad
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Reduction in prices
Cincinnati Wholesale Prices as a Percentage of Philadelphia, New York,
and New Orleans Wholesale Prices, 1816–1860a
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product or service or otherwise on a password-protected website for classroom use.
What are turnpikes and who paid for them? Did they
significantly lower transportation costs?
Who paid for the canals?
Are transportation methods Public Goods? Should the
Government pay for them? Why or why not?
What happened to the cost of shipping agricultural
(and other) goods between 1800 and 1860? How did
this impact the difference in prices of those goods
between the farms and the cities?
In 1870, what is the cheapest way to ship goods in the
United States?
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