Homework 1:
Econ 111a American Economic
History Due Monday July 8, 2019
Question 1: The American colonies regularly faced a trade deficit in the eighteenth century, but it faced a small balance of payments deficit. Use the following table on the Balance of Payments for the 13 Colonies from 1768–1772 to discuss why this was the case.
Trade Deficit
Excess of Import over Export represents Trade Deficit
Trade Deficit= Import-Export
= (3920-2800)
=$1120

Balance of Payment: Excess of payment made to foreign over the payments from the foreign =Foreign payments made- foreign payments received
= (Imports+ Indentured servants+ slaves+ Taxes)- (Export+ Ship selling + Shipping cargoes +commission+ Average of military and civil)
= (3920+80+200+40) - (2800+140+600+220+450)
= (4240 – 4210)
=$30
High fluctuation in the exchange rate resulted in high trade deficit because it affects imports and exports. As compared to trade deficit, the balance of payment was very low as the fluctuation in the exchange rate has an indirect effect on the balance of payment deficit.

Question 2a: Suppose the only input in agriculture is time and the following chart depicts the time it took for the Middle Colonies and New England to produce barley and milk. Which region has an absolute advantage in producing barley?
Time Required to Produce:
Time to produce:
New
Englan d
Middl e
Coloni es
1 ton of barley 4 hours 5 hours
1 ton of milk 3 hours 6 hours
Question 2b: Which region has an absolute advantage in producing milk?
New England has an absolute advantage in producing milk as it only takes 3 hours for New England to produce a ton of milk compared to 6 hours taken by Middle
Colonies.
Question 2c: Does absolute advantage determine trade patterns (i.e., which goods a region imports and exports)? Explain.
No, absolute advantage doesn’t determine trade patterns as absolute advantage only informs about the specialization properties of a place. It cannot help in determining trade patterns among places as it does not talk about a region’s ability to import export certain product. In order to determine trade patterns, we need to know the comparative advantage between goods among different regions.

Question 2d: Which region should specialize in producing barley? Which region should specialize in producing milk?
New England opportunity cost of Producing barley= 4/3= 1.33 ton of milk
New England opportunity cost of producing milk= ¾= 0.75 ton of Barley
New England has comparative advantage in the production of milk. Hence New
England produces milk.
Similarly, Middle Colonies have a comparative advantage in production of barley.
Hence Middle colonies produce Barley.

Question 2e: Does comparative advantage imply absolute advantage? Yes or no.
Explain.
Comparative advantage is a relative concept. Even if one country has an absolute advantage in making two goods, another country might have a comparative advantage in producing in one of them good and thus it would be beneficial for the countries to trade.
Question 3: Based on the two charts below, does life expectancy appear to be a reasonable proxy for per capita income? Explain. Note: France and United
Kingdom are part of Western Europe. In 1700, India had a higher per capita income than the USA. By 2003, incomes in the USA were ten time higher than those in
India. What two factors would Douglas North argue explain the difference in Indian and USA development? Name them and briefly explain their importance.

ARE
A
10 0 15 17 0 18 19 0 19
0 00 0 20 0 50
20
03
W es t e rn
E u ro p e $4
27
USA
In
C
A dia hin fri a ca
450
$7
72
600
$9
97
527
550
600
4 25 41 4 42 1
$
2
1
1
7
,20
,25
533
600
420
$2,89
2
4,09
1
599
5 4
60
5
1
$5,5
3
6 1
1
9
439
893
$
2
1 9,9
9,561 29,03
7
2, 1 6
0
1
4,609
1
9
,5 4
Wo rl d
450 566 6 1 5 667 1
2
,26 2, 11 4 6,477
Source : Maddison 1 995, 23, 2 4 ; 2007. h tt pJ/www.ggdc.net/ma dd ison(.
Per capita income is related to life expectancy as income impacts food supply, better healthcare facilities, access to basic amenities and medical care. However, life expectancy cannot be taken a proxy of per capita income as other factors are responsible for the rise and fall in income.
The table show the following:
- From 1900 to 1950s, life expectancy increases in China but per capita income fell.
- Life expectancy has not increased so much in comparison to income.

This can be witnessed in Western Europe.
- Life expectancy has increased for all the countries but the increase in income is disparate. Hence cannot be compared.
Thus, life expectancy cannot be taken proxy of per capita income.
Factors responsible for U.S. growth compared to India
- Market economy in the US attracted a large number of resources. These resources then led to the production which was included in GDP.
- The improved technology in the US led to the development of the manufacturing sector and improvements in the Transport industry.
- India was a British colony for a long period of time while after
Independence, US turned into a capitalist country which led to more growth in the market sector.