Mercantilism

Definition

Mercantilism is an economic policy that was prevalent in Europe from the 16th to the 18th century, which focused on increasing a nation's wealth and power through the regulation of international trade. The primary goal of mercantilism was to run a trade surplus, meaning the value of a country's exports would exceed the value of its imports.

5 Must Know Facts For Your Next Test

1. Mercantilism was based on the belief that a country's wealth and power were directly linked to its accumulation of precious metals, such as gold and silver.
2. Mercantilist policies often involved imposing high tariffs on imports and granting monopolies to domestic producers to protect domestic industries from foreign competition.
3. Colonies were seen as valuable assets under mercantilism, as they could provide raw materials, markets for exports, and a source of precious metals.
4. Mercantilism promoted the idea that exports should be maximized, while imports should be minimized, in order to maintain a favorable balance of trade.
5. The decline of mercantilism was influenced by the rise of classical economic theory, which emphasized the benefits of free trade and the pursuit of comparative advantage.

Review Questions

• Explain how the goal of maintaining a trade surplus was central to mercantilism.
  • The primary goal of mercantilism was to run a trade surplus, where the value of a country's exports would exceed the value of its imports. This was seen as a way to accumulate wealth and power, as the surplus would result in an inflow of precious metals like gold and silver. Mercantilist policies, such as imposing high tariffs on imports and granting monopolies to domestic producers, were designed to promote exports and restrict imports in order to maintain this favorable balance of trade.
• Describe the role of colonies in the mercantilist economic system.
  • Under mercantilism, colonies were viewed as valuable assets that could provide raw materials, markets for exports, and a source of precious metals. Colonies were expected to be economically dependent on the mother country, supplying raw materials and serving as captive markets for the metropole's manufactured goods. This allowed the mother country to maintain a trade surplus and accumulate wealth, while the colonies were restricted from developing their own industries or trading freely with other nations.
• Analyze how the decline of mercantilism was influenced by the rise of classical economic theory.
  • The decline of mercantilism was driven in part by the emergence of classical economic theory, which challenged the mercantilist belief that a trade surplus was the key to national wealth and power. Classical economists, such as Adam Smith, argued that the pursuit of comparative advantage and the benefits of free trade could lead to greater overall economic prosperity, even if it resulted in trade deficits. This shift in economic thought undermined the rationale for the protectionist policies and restrictive trade practices that were central to the mercantilist system, ultimately contributing to its decline.

Related terms

Protectionism:

An economic policy that restricts or regulates international trade to protect domestic industries from foreign competition.

Trade Surplus:

A situation where the value of a country's exports exceeds the value of its imports, resulting in a positive balance of trade.

Balance of Trade:

The difference between the value of a country's imports and exports, representing the net flow of goods and services into or out of the country.