Question

Using the Mercantilist approach; suppose a large nation is running significant trade deficits with a smaller nation. They are exporting finished goods to the smaller country, and importing raw materials and intermediate goods. Is this good/bad? If good/why? If bad/what should be done?

Answer 1

No it is not a good thing to do because smaller countries may have the required resources but they don't have the technology or capital or man power to use those resources. If the large nation is able to take those resources and give them finished goods that the both countries will be benefited during that trade. However Here already the large nation is having a trade deficit with small country which means the large nation is importing more than its exports. According to Mercantilist approach any country should maximize its exports and minimize it's imports and here large nation is doing opposite to Mercantilist approach.

So large nation should enter new markets and export those finished goods in its new markets. To enter new markets the large country should be able to produce goods at a very low average total cost so that they can produce additional output at a low cost which will helps firms to earn profits.