Question

Mercantilists believed that two nations can gain from trade by trading according to each of their absolute advantages. Is this a valid statement? Explain (15)

Answer 1

Mercantilists were a group of writers in Europe from around 1500s to 1800s. They believed that trade was a " zero sum game " ie the one of the countries would be losing if the other is gaining in trade.

In the view of mercantilists , the inflow of bullion ie gold and silver was considered to be beneficial for the country ie was a sign of strengthening of the country's position in the world trade and the outflow meant losses. Hence they encouraged exports and imports were discouraged by them.

Also they preferred government intervention in the trade policies rather than the free trade policies because it was believed that if the government increased tariff and other barriers to imports in the nation, the imports would reduce which would be beneficial for the country as less of the outflow of gold would occur. This surplus of gold would be required to increase the power of the nation in the world and dominate over the nations which are importing or have a major outflow of gold and silver.

Morever the belief of the mercantilists that the gain of one country is possible only when the other country is losing was challenged by Adam Smith who stated the concept of "Absolute Advantage". He believed that both the countries can gain in the trade when they produce the goods in which they have absolute advantage in ie is producing it more effciently than other nations.

So the statement in the question is invalid.

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