Question

1. Why was a positive trade balance so important to Mercantilists?  In Mercantilist thinking, why did a positive trade balance not result in domestic inflation and a loss of international competitiveness?

2. What were the critical foundations of Mercantilist thought?  What trade policies resulted from this way of thinking?

3. Explain what is meant by a zero-sum game, and why it was central to Mercantilist thinking.  Then, explain how Smith’s idea of absolute advantage altered the nature of the “game.”

I need clear explanation about these questions. Thanks

Answer 1

1)

Mercantilists were obsessed with bullionism or silver and gold. Thus, they were not in favor of the larger import. They wanted to keep the balance of trade positive. Simply speaking, they were supporting the larger export over the import. If the trade balance is positive, the country will be able to earn a larger amount of gold and silver.

The international trade system was not so much developed during the phase of mercantilism. Further, trade was mainly associated with the exchange of gold and silver. Thus, inflation was not a matter of concern. Free trade was not supported by the mercantilists.

2)

According to mercantilists, trade can not be beneficial to all members. and trade was mainly associated with amassing the bullion. Trade can not be beneficial to all. Following are implications:

• Government intervention was required to increase wealth.
• The main purpose of trade was only the earning the gold and silver.
• tariffs on import were recommended by the government.
• industries were given tax concessions.

3)

The zero-sum game means the profit of one trading partner is simply the loss of another partner. Both trading partners can not gain from trade.

but Adam Smith through its trade theory sought to demonstrate that trade can be beneficial to all member partners. Thus, each country would specialize where it has absolute advantage and trade would prove beneficial to all countries.

Hence, zero-sum game theory was dismembered by the Free trade theory of Adam Smith.