1a. How does the mercantilist concept of national wealth differ from today’s view?

Mercantilist - “Merchants”
- all about self interest (want to make $ don’t care about others)

Mercantilist – A nations wealth depends on accumulated treasure. (gold & silver are the
currencies of trade.)

Theory says should have a trade surplus

- maximize exports through subsidies
- minimize imports through tariffs & quotas

Flaw: assumption that trade is a “zero-sum game”

(believed that a nation could gain in trade only at the expense of other nation.)

Increased exports leads to inflation and high prices.

- because when export too much, means higher inflow of money.
- too much money chasing for too few goods – inflation.

Increased imports leads to lower prices

- because when import too much, means higher outflow of money (lower
money supply)
- so when people not enough money to buy, price will drop.

Long run, no one can keep a trade surplus.

Today’s view

• Although most nations claim to be in favor of free trade, most of them continue to
impose many restrictions on international trade.
– Most industrial nations restrict imports of agricultural commodities,
textiles, shoes, steel and many other products in order to protect domestic
employment.
– Provide subsidies to some of their hi-tech industries, such as computers
and telecommunication, deemed essential for international
competitiveness of the nations future growth.

• Mercantilism, though declining, is still alive.

1b. Why did mercantilism advocate the accumulation of gold?

• More gold & silver a nation had, the richer & more powerful it was

• For a nation to become rich & powerful

– max. exports through subsidies
– min. imports through tariffs & quotas

1c. How do the mercantilists’ views on trade differ from those of Adam Smith?

Mercantilist – For a nation to become rich & powerful

 max. exports through subsidies
 min. imports through tariffs & quotas

Adam Smith – Trade between two nations is based on absolute advantage.

– A country should specialize in production of commodity that
they are most efficient (absolute advantage).
– Exchange with other nation for commodity of its absolute
disadvantage.

When one nation is more efficient than (or has an absolute advantage over) another in the
production of one commodity but less efficient than (or has an absolute disadvantage with
respect to) the other nation in producing a second commodity, then both nations can gain
by each specializing in the production of the commodity of its absolute advantage and
exchange part of its output with the other nation for the commodity of its absolute
disadvantage.

By this process, resources are utilized in the most efficient way and out put of both
commodities will rise.

Positive-sum game - Both nations gain

References

1. Salvatore, D (2004), Chapter 2: The Law of Comparative Advantage

2. Ch. Hill (2005) Chapter 4 : International Trade Theory
3. Laura’s Lecture Notes no.2
4. Mr Goon’s Tutorial Notes no.1