Chapter 1 Solutions

CHAPTER 1: The Power of Principles: A Historical Perspective

SUGGESTED ANSWERS TO END-OF-CHAPTER QUESTIONS

1. Why is infrastructure essential to economic development?

Infrastructure includes those assets that assist in the production or distribution of goods and services that firms themselves cannot easily provide. Infrastructure facilitates transportation, communication, and financing. It includes basic research, which can enable firms to find better production techniques. The government also has a key role, both because the government affects the conditions under which firms do business (e.g., regulations) and because the government is a direct supplier of infrastructure (e.g., interstate highways). Infrastructure reduces the costs associated with business transactions, thereby making these transactions feasible.

2. What was the role of the factor in the mid-19th century economy? Does such a role exist in the modern economy?

Factors essentially provided the demand for goods and services. Farmers and small manufacturers sold their production to factors who were often local merchants seeking to stock their store, or to agents representing out of town merchants who were essentially “distant” factors. In today’s economy, factors still exist in many forms. Think of large online retailers like Amazon that function like the merchants of the 1900’s by purchasing the production firms and providing access to the consumer market.

3. How would John Burrow’s life have been different if he had access to the “Internet?” What if farmers and retailers also had access to the “Internet?”

John Burrows would have faced significantly less risk by having access to the Internet. His business model of purchasing agricultural products locally and shipping them to distant markets left him at the mercy of the product’s supply in those distant markets. With access to the Internet he could have researched prices for the products he purchased regionally,...