6.3 The British Economy

Question 1

Define capitalism.

Answer 1

An economic system in which private businesses control trade and industry for profit.

Question 2

Define National Debt.

Answer 2

The debt owned by a government borrowing from banks so that it can finance its activities.

Question 3

Define capital investment.

Answer 3

Putting money into a financial or commercial project with the hope of gaining interest later.

Question 4

Define economy.

Answer 4

Money that flows in and out of a country through taxation, trade, and debt.

Question 5

What was the War of the Spanish succession?

Answer 5

A war between European powers from 1701-1714.

Question 6

Define GDP.

Answer 6

Gross Domestic Product - the monetary value of all the goods and services within a country.

Question 7

How did the Bank of England help make Britain rich?

Answer 7

• The Bank had the monopoly on issuing bank notes
• The Bank lent the government money at the rate of 8% pa (per annum)
• The creation of the Bank created a National Debt. Owed by the government (taxpayers) and not the monarch
• The Bank could also lend to private businesses and people

Question 8

What was the South Sea Bubble?

Answer 8

N/A

Question 9

Why did people buy shares in the SSC?

Answer 9

• The government approved the Company’s scheme to minimise and manage the National Debt partly by issuing new shares in the South Sea Company
• The company published advertisements describing huge reserves of gold and silver in South America that it claimed it would be trading
• The company artificially increases the share price to £1,000 per share, making it seem very successful

Question 10

How did the ‘Bubble’ burst?

Answer 10

• The Company lent large amounts to people so that they could buy shares. It then needed to sell shares to have enough money to pay people the dividend on their shares
• Some shareholders, realising the share value was far too high for the company to support, started selling their shares
• As people sold their shares, their value decreased, so other shareholders panicked. There was a rush as everyone tried to sell their shares
• As the company did not have the money to pay people back, most shareholders lose all their money and the company collapsed.

Question 11

How did Britain become wealthy?

Answer 11

Plantations:
- sugar
- tobacco
- cotton

Bank of England:
- provided money to wage war
- acquisition of new territories
- more goods and resources to Britain

EIC:
- paid dividends to shareholders which they re-invested in companies