• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Evaluate the macroeconomic and structural effects of overseas investment during the period 1870-1913.

Extracts from this document...

Introduction

Evaluate the macroeconomic and structural effects of overseas investment during the period 1870-1913 Over the period 1870-1913, Britain invested an extensive amount of capital overseas. While it is not clear whether funds were "pushed" abroad by low domestic returns or "pulled" by high overseas returns, this substantial capital export was a noticeable feature of the UK economy, constituting approximately 4% of GDP per annum out of a total capital formation of 12%. The main recipients countries were the Empire, the US and South America while the main sectors were transport, public works and utilities. There has been debate over whether these funds would have been better put to different uses, namely domestic investment; in this essay we shall evaluate what the effect this accumulation of overseas asset had on Britain's macroeconomic and structural condition. According to Rowthorn and Solomou, overseas income as a proportion of GDP rose from 2% in 1872 to 7% in 1913. This income had possible influence on Britain's balance of trade and we shall examine two potential mechanisms, firstly the Dutch disease; this makes itself felt in a fixed ...read more.

Middle

which worsens the trade balance. Rowthorn and Wells constructed a model in which the expansion of overseas assets and income can spontaneously lead to a permanent balance of trade deficit which turns the lending country into a rentier nation. The crucial condition for this to occur is that the rate of return on overseas investment is greater than the growth rate of the domestic economy (this creates a situation where the rise in consumption cannot be met by the increase in domestic production). During this period 1870-1913 the real rate of return on overseas assets was considerably higher than the UK growth rate. Change in the trade balance must be offset by changes in other elements of the national income accounts. In particular, they can be offset by changes in domestic investment, the propensity to consume and a change in foreign income. The worsening trade balance saw temporary improvements in two period (1877-1890 and 1898-1913). The improvement in those periods can be largely attributed to a fall in domestic investment reducing absorption, although the second period was assisted by a fall in the propensity to consume. ...read more.

Conclusion

Unemployment was connected with the capital export debate: Hobson proclaimed in 1911 that in view of the high level of capital exports, "we cannot wonder at the increase in unemployment and of distress among the working classes". Had capital been diverted from foreign to home destinations, it might have absorbed this unemployed or underemployed labour without endangering the rate of its own return. It seems there were notable adverse consequences of excessive overseas investment. However, there is opposition to this view in that keeping investment domestic would have ineffective; for example, McCloskey quoted famously that "by keeping savings at home, the British people could have had two Forth bridges, two bakerloo lines, two London housing stocks, two Port Sunlights". In addition British investment in overseas capital lowered the price of foreign foodstuffs and raw materials. This improved Britain's terms of trade by approximately 0.1% per annum. In conclusion it is difficult to state whether the overall macroeconomic and structural effect of overseas investment over the period 1870-191 was positive or negative. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our University Degree Political & International Economics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related University Degree Political & International Economics essays

  1. Balance of Payments. It follows from double-entry bookkeeping that the balance of payments ...

    given some reference point in the past , the authorities have not imposed additional trade or payments restrictions in order to reach equilibrium ; and (2) equilibrium is not attained unless there is a simultaneous attainment of full employment without price inflation .

  2. Labor Economics of Immigration. In neoclassical economics migration is considered a disequilibrium that ends ...

    This is proposition is an example of migration mainly determined by the nature of labour demand in the destination country (Piore 1979). Other literature in microeconomic theories of migration include that of Sjaastad (1962) and DeJong and Fawcett (1981) which chiefly focused on the valuation of immigrant as the main criterion for his or her migration decision.

  1. Foreign Direct Investment: country comparison

    Perez oversaw major decentralization of the Venezuelan government and dictatorial control diminished (Diaz-Cayeros, 2006). Free market measures were implemented under the foreign investment code "Executive Decree 2095", including elimination or reduction of certain subsidies and price controls, lowering the corporate tax rate from 50% to 30% and average tariffs from

  2. Evaluate the macroeconomic and structural effects of overseas investment during the period 1870-1913

    Persistent unemployment reduced maximum potential national income, and therefore reduced the ability of the UK economy to grow as fast as was possible. Furthermore, unemployment may have reduced national welfare if investors' welfare gain was less than the welfare loss of the unemployed.

  1. 'Expectations of the future have a significant impact upon consumption and investment decisions made ...

    However, on the whole a lower interest rate encourages consumption as opposed to saving. "An investment is defined as any asset into which funds can be placed with the expectation that the invested capital will generate additional positive income; and many investors, will insist that, as a minimum requirement, the

  2. The Restoration period in Scotland.

    The capital benefited from free trade, which was its right as a royal burgh. By 1670, Edinburgh's share of the total burgh tax assessment was 33%.8 Overseas trade mainly consisted of cheap goods such as wool and grain. However, England's Navigation Acts hindered further development of Scottish trade by restricting

  1. Describe the Positive and Negative Effects of Globalisation on China

    For the leading systems integrators and ï¬rst tier suppliers in each industrial sector, this is a competition between small numbers of identiï¬able large, often oligopolistic, ï¬rms. The struggle is not between the in-numerable nameless small ï¬rms of textbook perfect competition (Nolan & Zhang, 2002, pp.

  2. The establishment of the World Trade Organisation has led to a significant reduction in ...

    Net Food-Importing Developing Countries ________________ ________________ Decision on Trade and Environment ________________ BRIEF OF EVENTUAL ROUNDS 1995 - The World Trade Organization is created in Geneva. 1999 - At least 30,000 protesters disrupt WTO summit in Seattle, US; New Zealander Mike Moore becomes WTO director-general.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work