Question

Colonial America had little industry and so had mostly raw materials to export. At the same time, there were many opportunities to purchase capital goods and earn a high rate of return because there was little existing capital so that the marginal product of capital was relatively high. What does this suggest about net exports and net capital outflow in colonial America?

Answer 1

Ans.

If the colonial America had little industry and so had mostly raw materials to export. At the same time, there were many opportunities to purchase capital goods and earn a high rate of return because there was little existing capital so that the marginal product of capital was relatively high. This suggests that
- the colonial America was depended on imports for the capital goods
- It was doing very little export for raw material,
- Combined reading of the two suggest that the net exports were negative and there was trade deficit because of high dependence on the import and very negligible exports.
Also since the export is only for raw material whereas the import is for capital goods which will be very high value items , the trade deficit must be very large and also the colonial Americas exchange rate also be depreciated because of large borrowing and higher trade deficit.