Mercantilism prevailed from 1500 to still alive today describes a set of common attitudes toward international trade - its benefits and costs also reflects the prevailing definition of wealth of the time associated with the rise of the merchant class in early colonial times

Mercantilism and Trade trade is a zero-sum game - if one country is gaining from trade, the other must be losing to win from trade a country must export more than it imports X>M = a favourable balance of trade M>X = an unfavourable balance of trade This language has survived till today!

Mercantilism and Wealth Wealth is measured by the amount of gold and silver contained in a nation’s treasury! (miser’s definition of wealth) Exports and imports of specie (gold and silver) were banned and smuggling severely punished Monopolies were used to maximize the amount of specie a government could collect (East India Co., HBC)

THE TENETS OF MERCANTILISM That every inch of a country's soil be utilized for agriculture, mining or manufacturing. That all raw materials found in a country be used in domestic manufacture, since finished goods have a higher value than raw materials. That a large, working population be encouraged.

THE TENETS OF MERCANTILISM That all export of gold and silver be prohibited and all domestic money be kept in circulation. That all imports of foreign goods be discouraged as much as possible. That where certain imports are indispensable they be obtained at first hand, in exchange for other domestic goods instead of gold and silver.

THE TENETS OF MERCANTILISM That as much as possible, imports be confined to raw materials that can be finished [in the home country]. That opportunities be constantly sought for selling a country's surplus manufactures to foreigners, so far as necessary, for gold and silver. That no importation be allowed if such goods are sufficiently and suitably supplied at home.

Mercantilism and Policy Navigation - control the waterways (monopoly) Trade Monopolies to increase inflow of specie Domestic monopolies to extract gold from people royal manufacturers, guilds, special privileges

wages set institutionally - kept low to increase “wealth of nation” as measured by precious metals lower classes kept poor to ensure they would remain productive war used to win power over other nations - get their gold powerful army and merchant marine seen as very important Result: Rich nations (in terms of gold) had poor populations (in terms of consumption)

Decline of mercantilism: –During the 1800’s people started to reject this system –1776 – United States became independent from European powers –Scottish economist, Adam Smith, published books that advocated free trade

Challenges to Mercantilism Early 18th century opposition to mercantilism arose Opposition grew out of historical accidents and new philosophies –the conquest of the new world led to an abundance of gold bullion –David Hume, Adam Smith and David Ricardo all presented strong counter arguments to old attitudes

Adam Smith Moral philosopher Described the emerging capitalist system in detail Changed the definition of “Wealth of Nations” taught that economies work best when people are permitted to pursue own self- interest taught that monopoly is dangerous to prosperity

Adam Smith Promoted laissez-faire approach by government meaning –don’t create monopolies –don’t mandate low wages for workers –don’t force people into professions based on ancestry –don’t allow sub-groups (merchant class or aristocracy) to control the economy

Trade as a positive-sum game taught that trade can create wealth for all partners, both sides could win at the same time Example: where one country is better at producing one good and another is better at producing a second, –more is produced and consumed if each country specializes in production and trades than if each country produces only for its own market

Theory of Absolute Advantage  “The capacity of one nation to produce more of a good with the same amount of input than another country.” –Adam Smith claimed that market forces, not government controls should determine the direction, volume, and composition of international trade. –Each nation should specialize in producing goods it could produce most efficiently –In absolute advantage, both nations would gain from trade. Assumptions –Perfect competition and no transportation costs in a world of two countries and two products.