VERSION B 7c.Explainbriefly what one major economic impact of the changes observed between 1850 and 1914 was. (15 points) Higher capital flows should raise the capital labor ratio and investment raising the marginal product of labor and wages. In short, higher economic growth. It allowed for risk sharing and consumption smoothing. Exposure to capital flows could make some emerging economies more prone to financial crises in the 19thcentury. END OF QUESTION #1 Answer the following questions about the “capital flows” 1.When a country experiences capital inflows what do we know about its trade balance assuming reserves are not changing? Which countries were likely to have trade deficits between 1850 and 1914 and which type of countries would have a surplus? (20 points) EX-IM + Net Capital inflows – (Change in reserves) = 0 If changes in reserves are ignored then a country with capital inflows has a trade deficit. Poor countries or capital scarce countries should have trade deficits and capital inflows. In the 19thcentury capital flowed to resource rich, immigrant receiving areas like Canada, Australia etc.