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Chapter 2: Problem 12

In colonial America, the population was spread thinly over a large area, and transportation costs were very high because it was difficult to ship products by road for more than short distances. As a result, most of the free population lived on small farms, where people not only grew their own food but also usually made their own clothes and very rarely bought or sold anything for money. Explain why the incomes of these farmers were likely to rise as transportation costs fell. Use the concept of comparative advantage in your answer.

Short Answer

Expert verified
The incomes of farmers in colonial America were likely to rise as transportation costs fell due to the principle of comparative advantage. Lower transportation costs allowed farmers to trade goods they could produce more efficiently or abundantly, increasing their productivity and income.

Step by step solution

01

Understanding the situation

In colonial America, the high costs of transportation limited the ability of people to trade goods over long distances. Most people lived on small farms and were largely self-sufficient, creating their own food and clothing, and very rarely traded anything for money.
02

Defining comparative advantage

Comparative advantage is an economic concept that suggests that all entities, regardless of their level of productivity, can engage in mutually beneficial trade. They do this by focusing on tasks they can perform most efficiently.
03

Applying comparative advantage to the situation

If transportation costs were to fall, farmers could potentially benefit from trading goods they can produce relatively more efficiently or abundantly than their potential trading partners.
04

Linking reduced transportation costs to higher incomes

Lower transportation costs make it economically feasible to trade goods over greater distances. This allows the farmers to exploit their comparative advantage, specialize in the production of certain goods, and trade the surplus for other needed goods. By doing so, they can increase their overall productivity and, subsequently, their income.

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