Question

1.Mercantilism and Comparative Advantage are trade theories. Mercantilism is called a "zero sum game" and is said to "beggar thy neighbor" meaning to make your neighbor poorer. Comparative Advantage is a "win-win" or "plus sum game" to benefit all parties. Access outside resources and comment on these two trade theories. When were they first used and how are they used today?  

2.The Balance of Payments records funds leaving and entering a country. I will categorize the funds into three sections: Current Account (basically trade - imports and exports), Capital/Finance Account (investments - Portfolio Investments and Foreign Direct Investments), and the Official Reserve Account (Central Bank involvement with the currency exchange market). NOTE: The textbook distinguishes between the Capital Account and the Financial Account, but I put them both together.

For the United States what is the impact of the trade deficit on the flow of funds in the Current Account, and the subsequent affect on the funds flow of the Capital/Finance Account? In the long run how are United States assets affected? (Hint: think exchange rates and international investments)

Answer 1

1) Mercantilism:

This was used in the imperial times when colonizing europe would make the colonies empty of their own resources. The time line can be traced back to the 17th and 18th century. Countries like Singapore and India were trained to fuel the industrial revolution in Britain.

2) Comparative Advantage:

With the coming of economics and rationality, people understood the process of trade. Ricardo is to be credited for the application as well as formulation of the theory of comparitive advantage. The term comparative advantage was first used in England in the early 19th century by economists of the classical school, which dates from the publication of Adam Smith's An Inquiry into the Nature and Causes of the Wealth of Nations

B) The overall effect of the deficit from both Current and Capital Account leads to increased federal spending. This led to increased in government spending and also public debt will increase. At the same time suspending so many countries and their export will lead to lack of investment in the country. While the outflow of cash will increase, foreign reserves will decrease. Blocking imports without changing underlying savings and investment levels would simply raise the value of the dollar and cause exports to fall as well, leaving the deficit unchanged but reducing overall trade and making the country poorer.