Chapter 2: Colonial Development Summary This chapter outlines key patterns of colonial settlement to help students understand how the colonial economy of the United States developed. The various private and public factors influencing colonists’ decisions to settle and build in different locations are highlighted. Discussions on how the economic and political circumstances influenced colonial decisions on what to produce, how to produce and for whom to produce occur throughout the chapter. The roles of specialization, operation on the basis of comparative advantage, free trade and reliance on market prices to direct activities are tied together in explaining what forces fueled economic progress in colonial America. This chapter also considers the role of the government in securing and enforcing private property rights and providing public goods and services. Finally, taxes, subsidies, controls and other interventionist activities in the private market affairs of colonists by government, their impact on the production and income levels of colonists and the building of tensions between colonists and interfering government officials in the British Empire are evaluated. Key Terms and Concepts Balance of payments Market overt Seaports Break-in-transport Markets Specialization Caveat emptor Monopoly Taxes Common law heritage Morals Towns, townships, counties Comparative advantage Opportunity costs Trade External economies Primogeniture Trade Deficit Laissez-faire Price signals Trade restrictions Licensing Quality controls Wealth Manufacturing Teaching Tips 1. Define production and explain that producers allocate scarce resources to those production alternatives promising the highest return at the lowest possible cost, including opportunity cost. English settlers, investors and others in the mother country strove to maximize profits by utilizing resources efficiently and effectively for the betterment of all trading partners. Discuss regional specialization and operation on the basis of comparative advantage in the New England, Middle and Southern Colonies. Explain that operation on the basis of regional comparative advantage and specialization increased colonial output and employment which then boosted income, consumption, savings, investment or the volume of trade. 2. Use this chapter to illustrate that the colonies progressed by selling goods and services that could be produced at a relatively low cost and by buying goods and services that only could be produced at a relatively high cost from the United Kingdom, the West Indies and southern countries. Discuss the roots of international trade in the United States. 3. Explain that price signals relate valuable information to consumers and producers. Changes in the market price of a particular good or service communicate to producers whether they should increase or decrease the amount supplied to consumers and/or whether they would want to decrease or increase the amounts purchased. By contrast, prices artificially set by governments, committees or boards do not reflect market conditions. Consequently, decisions to produce and consume are misinformed under fixed circumstances. They result in the diversion of resources from productive uses. 4. Use the contents of this chapter to lay the foundation for economic progress. Highlight the role of a stable legal system and secure private property rights. Explain how they motivate individuals to direct resources toward productive uses rather than wasting them.
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