Question

Discuss how the beliefs of the Mercantilists about a zero sum game were challenged by Adam Smith who argued instead about a positive sum game. (250 words)

Answer 1

Mercantilism is an old school of thought which was formed by heterogenous group of influential people to decide the regulation of domestic and international affairs . This group was largely driven by self interest and not the welfare of the economy . Mercantilists were of the view that TRADE WAS A ZERO SUM GAME because a country would benefit by exporting but would lose by importing . In other words , zero sum game implied that benefit of one person/country is the loss of other person/country. Thus , there is not a win - win situation in Trade.

However , Adam Smith criticised the marcantilist view in his book ' WEALTH OF NATIONS' . He threw light on the benefits of Trade and stated that it was a 'POSITIVE SUM GAME ' and not a 'ZERO SUM GAME' . Through his theories such as ABSOLUTE COST ADVANTAGE , he highlighted how an economy could benefit from trade due to cost differences i.e. A country should specialise and export that good where it has cost advantage in absolute terms and it should import the goods in which it doesnt possess the cost advantage . Hence , both parties involved in trade could benefit from this . Also it would make the parties cost effective and efficient in their respective areas of production offering more variety to the market at competitve prices. Thus , trade according to him is a WIN-WIN situation for both sides involved.