Mercantilist theory of international trade. international trade 2022-12-19
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The mercantilist theory of international trade is an economic philosophy that dominated the European economic system in the 16th, 17th, and 18th centuries. It holds that a country's wealth and power are determined by the amount of gold and silver it possesses, and that the only way to increase a country's wealth and power is to export more goods than it imports.
According to mercantilist theory, international trade is a zero-sum game, in which one country's gain is another country's loss. Therefore, mercantilists believed that a country should pursue policies that would encourage exports and discourage imports, in order to maximize its own wealth and power.
One way that mercantilist countries pursued this goal was through the use of tariffs and other trade barriers, which made it more expensive for foreign goods to enter the domestic market and thus made domestic goods more competitive. Mercantilist countries also sought to establish monopolies over certain industries, in order to control the production and distribution of certain goods and prevent competition from foreign producers.
Mercantilism also played a role in the colonization of new lands, as European powers sought to gain access to raw materials and new markets for their goods. This often led to conflict and exploitation, as colonizing powers sought to extract as much wealth as possible from the territories they controlled.
Despite its widespread influence, mercantilism was eventually challenged by Adam Smith and other classical economists, who argued that international trade could be mutually beneficial and that countries should not attempt to protect their domestic industries at the expense of others. Today, mercantilist theory is largely rejected by mainstream economics, which emphasizes the benefits of free trade and globalization.
Mercantilism theory and examples
The mercantilist theory is in effect the opposite theory to the liberal theory. China has been accused of offering too much subsidised investment for industry, leading to over supply of industries such as steel — meaning other countries struggle to compete. See Joyce Oldham Appleby, Economic Thought and Ideology in Seventeenth-Century England, op. Brian Pearce Cambridge U. Mercantilism was an economic system of trade that spanned the16thcentury tothe 18thcentury. Keyenes, The General Theory of Employment, Interest and Money London: Macmillan, 1936 ch.
Ricardo's law of comparative advantage showed that theanswer is yes. This reliance upon oil gave the oil embargo of 1973-74 such damaging effects on the global economy. The former communist countries of Central and Eastern Europe and the Soviet Union have all to some extent attempted the twin convergence to liberal democracy and capitalist economy. Mercantilism's theory relating to financial wealth building and state power supported the use of protectionism to increase export revenue and decrease imports. The concept of absolute advantage was developed by Adam Smith in The Wealth of Nations to show how countries can gain by specializing in producing and exporting the goods that they produce more efficiently than other countries, and by importing goods that other countries produce more efficiently. Porter determined four factors as determinants of national competitive advantage of the nation.
Liberal and Mercantilist Theories of Political Economy
The concept of the balance of trade, the price-specie flow mechanism and comparative costs are examples of the ancient lineage of the concerns of international economics. Failure to agree can lead to the costly maintenance or extension of trade restrictions. Mercantilism involves state control and regulation. The United States adopted a protectionist trade policy toward Japan and negotiated voluntary export restrictions with the Japanese government, which limited Japanese exports to the United States. However, there were moves away from free trade towards a more mercantilist or restrictive trade practices most notably in Germany and United States whilst even the British started to doubt free trade. Perhaps it would be more apt to describe the liberal theory as being neo-liberal as it has undergone a recent revival in popularity. The theory of comparative costs argues that, put simply, itis better for a country that is inefficient at producing agood or service to specialise in the production of thatgood it is least inefficient at, compared with producingother goods.
The United States is as keen to pursue free trade liberal policies as the British used to be, because they gain the most from those policies. Where possible Britain removed mercantilist restrictions to trade, allowing workers, businesses and investments to flow more freely Hobsbawm, 1975, pp. Eventually this creates resentment, which leads to rebellion, and ultimately it led to many colonies seeking out their own independence. Literary Remains London: John Murray, 1859 pp. What is meant by Mercantile Capital? Mercantile nations depend on being able to erect barriers in their own economies without their trading partners doing the same. These theories explain the mechanism of international trade that is how countries exchange goods and services with each other. Due to the effects of globalization, many nations and their people suffer from feeling that they've lost wealth, control, and prestige.
What is the difference between trade and mercantilism?
Mercantilism reduces trade and cooperation between countries, which makes goods more expensive and difficult to procure. Not only can restrictions be used to gain economic advantage they can also be used as political and economic sanctions against states that have transgressed in some way. Supple, Commercial Crisis and Change in England, 1600—1642 Cambridge U. Today, Russia and China still use a mercantilist system because it partners so well with their forms of government. Liberal theory is also promoted by the process of globalization that makes it easier for multinationals to operate within.
The labor and goods markets are assumed to be perfectly competitivein both countries. Surge of protectionist sentiment, e. It was a great paradox that liberal theory would regain some of its prominence in international political economy after 1945 just as the free market within most of the world was either tempered by welfare states or communist takeovers. Limiting wages and consumption of the working classes to enable greater profits to stay with the merchant class. A devout monarchist, Colbert called for an economic strategy that protected the French crown from a rising Dutch mercantile class.
What Is The Mercantilism Theory Of International Trade?
Allen, Essays in Economic Thought 1960 pp. The basis of liberal theory was the right to gain property or capital to be used however states, businesses or individuals felt appropriate combined with freedom of action and belief Eatwell and Wright, 2003, p. Imperialism Mercantilist governments manipulate a nation's economy to create favorable trade balances. On the other hand, mercantilism restricts imports and reduces the choices available to consumers. Eugene Rotwein, London: Nelson, 1955 pp.
Firms are assumed to maximize profit while consumers workers areassumed to maximize utility. Through the World Bank, the International Monetary Fund and the Bretton Woods agreement the United States government ushered in an era of liberalism that is still in operation to this day. The cost of failure or the benefits of success of liberalization of trade within the international political economy are great. Mercantilism basic ideas Most widely known mercantilist thinker Thomas Mun The basis of mercantilist thought can be summarized into thefollowing two statements: The economic health of a nation is measured by the amount ofprecious metals gold and silver it possesses The only way for a nation to increase its wealth, is the import ofprecious metals from abroad Direct import from the colonies International trade Mercantilism therefore considered positive trade balance asessential and used any economic policy measures to promote thisgoal Mercantilists regarded international trade as a zero-sum game 6. During the European Age of Exploration, the nations of Europe adopted a new economic policy called mercantilism. They wished to turn the clock back to unrestricted free trade internationally and the free market domestically with reduced welfare states Keegan, 1992, p.
Differences in natural and climatic conditions andtechnologies 13. The colonies also gave the mother country a market for exports, which led to more jobs and industrial development at home. In theory, when British colonists created their own products and obtained others by trading with their founding nation, they remained independent from the influence of hostile nations. Theory of comparative advantages example 2Corn ClothCanada 6 hours 10 hoursUSA 3 hours 2 hours Will there be trade according absolute advantages? Heckscher-Ohlin Theory Heckscher-Ohlin theory of international trade was given by Eli Heckscher and Bertil Ohlin. Originally introduced by European nations between the 1500s and 1800s, mercantilist nations instituted policies such as tariffs and subsidies to boost exports and make international imports more expensive. The collapse of communism certainly made liberal concepts within international political economy more apparent in the contemporary world Keegan, 1992, pp.
Mercantilism and classical theories of foreign trade
For example, tropical fruits cannot be grown in western countries such as the UK and France, so need to be imported. Mercantilism basic types Early mercantilism bullionism Main goal accumulation of precious metals Any export of precious metals was prohibited Developed mercantilism Main goal active trade balance Support of manufacture production Preached the necessity of maintaining domesticconsumption to a minimum in favor of exports and theneed to maintain wages at the lowest level labor theory ofvalue 7. N and Noble, D. Yet mercantilist theory is not likely to disappear from the international political economy just yet as governments are as likely to be guided by national self-interest and pragmatism as they have always been. Trevor Davies, Spain in Decline 1621—1700 London: Macmillan, 1961, ch.
