Advantages Of Mercantilism
In Modern Theory, the gains from trade are divided into the gains from production (specialization) and the ones from consumption (exchange). Both consumers and producers gain from international trade by consuming more and producing more than the pre-trade level. Whereas the classical theories were based on static advantages, theory nowadays assumes dynamic comparative advantage and bases on the determination of equilibria. The optimal allocation of trade versus production therefore can be found by comparing the opportunity cost of a good to the return it yields from im- or exporting. The total amount of gains from trade is then measured by adding up consumption and production gains. (Chenery 1961, p. 19)
3 Absolute advantage vs. comparative
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The main purpose and idea of mercantilism was that governments should regulate the country’s economy and thus increase its welfare. This was basically through the possession of gold, silver and other treasured metals and through the maximization of net exports. “Mercantilist doctrine taught that export was the only desirable economic transaction and goods were exported to enemy countries even in war time.” (Heckscher 1994) So, if one nation owned more gold than the other, it was undoubtedly better off. Thus, mercantilism can be explained by the term “bullionism”: the idea that the only true measure of a country’s wealth and success was the amount of gold that it had and if a nation did not own these goods, they should be acquired through trade with other countries. (Editors of Encyclopaedia Britannica) For a nation to reach its prosperity maximum it was necessary to achieve trade surplus, i.e. an excess of exports over imports, while governments controlled for the accumulation of bullion through trading companies and associations. (Islahi 2008, p.
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