Capital X 1

Question 1

Why would we think UK’s relative decline caused by too many capital exports?

Answer 1

Compared to Germany and US, proportion GNP invested at home was 5-7% compared to 12% in Germany and US
1/3 Brit’s wealth invested abroad
By WW1 had £4bn invested
Argued that this much invested abroad meant not enough for Brit econ

Question 2

Two main views:

Answer 2

1) Better to use capital domestically over abroad?

2) Better to invest abroad, so more domestic investment not productive?
- developing complementary economies
- increasing our customers’ purchasing power
- why duplicate infrastructure?

If were not the case, would have to show:

a) Investor irrational
b) Bias in capital markets that missed profitable uses for capital at home
c) Private interest does not coincide with national interest

Ie ‘there is a bLip in the “better to invest abroad” argument

Question 3

Where ie which sectors was the exported capital going?

Answer 3

2/5 docks and railways, 2/5 government, very little into industry

(Davis and Huttenback)

Question 4

Where ie area distribution is the export capital going?

Answer 4

By 1913, nearly half of investments went to Empire.

BUT NOTE r.e. ‘WHERE’ - investment varied by purpose and region over time

Question 5

What kind of movements did the capital exports follow?

Answer 5

Wave-like ones, around an upward trend.

Capital X > Home investment in peak years. Inverse waves of foreign and home investments

Question 6

What kind of factors influences waves of foreign and home investment?

Answer 6

Push- high level of domestic wealth, fading domestic returns, look for alternative investments
Pull- higher overseas returns, capital only used at home when few opportunities abroad

Depends on perspective: should we look at domestic needs first (push), or opportunities abroad (pull), satisfy that and then look at their particular counterpart.

Can talk about Solow model and steady state here

Question 7

Soooo were investors rational?
According to
1) Edesltein
2) Davis and Huttenback

Answer 7

1) Looked at securities and matches returns on different types
Returns: Overseas 5.7%p.a., home 4.6%p.a.
Defaults: No more prevalent abroad than at home
Risk: Variation in asset prices same for home and overseas
SO investors rational!

2) Looked at profitability of firms
Investor BROADLY rational, going where returns highest is home returns greater than abroad
Overall similar returns for home and overseas investment, but 1880 onwards domestic was 9%p.a., Empire 7.6%p.a.