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    Mercantilism: Mercantilist Economic System

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    Arslan Rammay
    Mercantilism was an economic policy that aimed to increase national wealth and power through restrictive trade policies and accumulation of gold and silver. It sought to promote domestic industries and employment while restricting imports and promoting exports to achieve a positive trade balance. Governments played an active role in regulating trade to achieve these goals. Mercantilism was later challenged by Adam Smith and others who argued that free trade and specialization according to comparative advantage could increase overall prosperity more than restrictive trade policies. They viewed international trade as mutually beneficial rather than a zero-sum game.

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    Mercantilism: Mercantilist Economic System

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    Arslan Rammay
    4 views3 pages
    Mercantilism was an economic policy that aimed to increase national wealth and power through restrictive trade policies and accumulation of gold and silver. It sought to promote domestic industries and employment while restricting imports and promoting exports to achieve a positive trade balance. Governments played an active role in regulating trade to achieve these goals. Mercantilism was later challenged by Adam Smith and others who argued that free trade and specialization according to comparative advantage could increase overall prosperity more than restrictive trade policies. They viewed international trade as mutually beneficial rather than a zero-sum game.

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    Mercantilism was an economic policy that aimed to increase national wealth and power through restrictive trade policies and accumulation of gold and silver. It sought to promote domestic industries and employment while restricting imports and promoting exports to achieve a positive trade balance. Governments played an active role in regulating trade to achieve these goals. Mercantilism was later challenged by Adam Smith and others who argued that free trade and specialization according to comparative advantage could increase overall prosperity more than restrictive trade policies. They viewed international trade as mutually beneficial rather than a zero-sum game.

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    4 views3 pages

    Mercantilism: Mercantilist Economic System

    Uploaded by

    Arslan Rammay
    Mercantilism was an economic policy that aimed to increase national wealth and power through restrictive trade policies and accumulation of gold and silver. It sought to promote domestic industries and employment while restricting imports and promoting exports to achieve a positive trade balance. Governments played an active role in regulating trade to achieve these goals. Mercantilism was later challenged by Adam Smith and others who argued that free trade and specialization according to comparative advantage could increase overall prosperity more than restrictive trade policies. They viewed international trade as mutually beneficial rather than a zero-sum game.

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    of 3

    Mercantilism

    Mercantilism was a form of economic nationalism that sought to increase the


    prosperity and power of a nation through restrictive trade practices. Its goal
    was to increase the supply of a state's gold and silver with exports rather
    than to deplete it through imports. 1
     It also sought to support domestic employment.
     Collection of economic thought from 1500-1750
    Mercantilist Economic System
     Holding of gold and sliver
     Emolyment enhncement
     strong army
     decrease imports increase exports
     enhance production capacity
     Dont share technology
     Strong state policies about trade
     Merchant class (Critical to the successful functioning of the economic system)
     Labor class (The most critical factor of production)
     Positive balance of trade / trade surplus

    The Role of Government

     collection of gold (increase the stock)


     Reduction of imports
     enhancement in exports
     police in the favour of exports/production
     provide and make safe of trade routs

    Challenges to Mercantilism

     Early classical writers such as David Hume and Adam Smith Challenged mercantilism

     First attack was raised by David Hume

     Positive balance of trade cannot be maintained indefinitely

    price-Specie-Flow Mechanism: Hume saw a flaw in mercantilist policies like


    accumulating bullion (gold/silver). He theorized an influx of gold would inflate prices,
    making exports expensive and imports attractive. This would naturally balance trade
    over time, making the whole bullion hoarding strategy pointless.
     Quantity theory of money

    MsV= PY
    Ms=Supply of money
    V=Velocity of money
    P=Price level
    Y=Level of real output
    V and Y are held constant, so increase in Ms caused proportional change in P

     Second assault on mercantilism came from Adam Smith

     Money as a Tool, Not Wealth:(people thing gold/sliver is the symbol of country


    wealth. david said money is tool for trade not wealth itsels. orgional weath is
    production capacity.

    : Mercantilists viewed international trade as a fixed pie. One nation could only gain
    wealth at another's expense
    Mercantilists focused on accumulating gold and silver (bullion) through export
    surpluses. Smith believed wealth came from producing valuable goods and services, not
    just holding gold

    Smith's Alternative:
    Free Market and Specialization:
    invisible hand" that directed individual actions towards the collective good. Competition
    would drive down prices and benefit consumers.

    Comparative Advantage
    A country has a comparative advantage in producing a good if the opportunity cost is
    lower than in other countries

    Ricardian Model (discuss comparative advantage )


    1. Fixed resources and technology
    2. Completely mobile factors of production (labour in the simplest case) inside each
    country
    3. Completely immobile factors of production between the countries
    4. Full utilization of resources
    5. Perfect competition
    6. [Labour theory of value (not necessary for PPF analysis)]
    7. Zero transportation costs
    8. Constant unit costs
    9. No government imposed obstacles
    10. Full employment
    11. Two countries, two commodities world

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