Mercantilism

Definition

Mercantilism is an economic theory and practice that dominated European economic policy from the 16th to the 18th centuries, emphasizing the importance of stockpiling precious metals and maintaining a favorable balance of trade. It connects closely to the rise of colonial empires, where countries sought to increase their wealth through state intervention in the economy, focusing on exports over imports. This system encouraged nations to acquire colonies to provide raw materials and serve as markets for manufactured goods, fostering competition among European powers.

5 Must Know Facts For Your Next Test

1. Mercantilism promoted the idea that a nation's power was directly related to its wealth, particularly in gold and silver reserves.
2. To achieve a favorable balance of trade, mercantilist nations often imposed tariffs on imports and provided subsidies to exports.
3. Colonies were seen as essential under mercantilism because they could supply raw materials that were unavailable in the home country.
4. The mercantilist system contributed to European rivalries, as nations competed for colonies and trade dominance across the globe.
5. Mercantilism eventually faced criticism during the 18th century, leading to the rise of classical economics and free trade theories.

Review Questions

• How did mercantilism influence the establishment and development of European colonies during its peak?
  • Mercantilism significantly shaped the establishment of European colonies as nations sought to increase their wealth by controlling resources and trade routes. Colonies provided valuable raw materials that could be processed and sold for profit in Europe, while also serving as exclusive markets for finished goods. This created a cycle of dependency where colonies relied on their mother countries for manufactured products, thus solidifying the mercantilist economic model and enhancing national power.
• Evaluate how mercantilist policies contributed to economic rivalries among European nations in the 16th to 18th centuries.
  • Mercantilist policies intensified economic rivalries among European nations by fostering competition for control over colonies and trade routes. Countries like England, France, Spain, and the Netherlands engaged in conflicts to secure profitable territories rich in resources. These rivalries not only led to wars but also fueled an arms race in naval power as nations sought dominance over global trade networks, illustrating how mercantilism shaped geopolitical relations during this period.
• Critically analyze the decline of mercantilism and its impact on modern economic theories.
  • The decline of mercantilism emerged with the rise of classical economics, which advocated for free trade and minimal government intervention in the economy. Economists like Adam Smith criticized mercantilist practices for restricting trade and innovation. This shift towards free market principles laid the groundwork for modern capitalism, promoting ideas such as comparative advantage. The transition from mercantilism allowed nations to pursue more dynamic economic strategies that fostered growth, investment, and international cooperation.

Related terms

Balance of Trade: The difference in value between a country's imports and exports, with a favorable balance occurring when exports exceed imports.

Colonialism:

The practice of acquiring and maintaining colonies, which were often exploited for resources and markets, fitting within mercantilist policies.

Protectionism: Economic policy of restricting imports from other countries through tariffs and regulations to protect domestic industries, commonly associated with mercantilist strategies.