Mercantilism

Definition

Mercantilism is an economic theory and practice that emerged in the 16th to 18th centuries, emphasizing the importance of accumulating wealth through a favorable balance of trade, particularly by exporting more than importing. This system views international trade as a zero-sum game where one nation's gain is another's loss, which led to policies that aimed to enhance national power and economic strength, often involving government intervention in the economy.

5 Must Know Facts For Your Next Test

1. Mercantilism dominated European economic policy from the 16th to the 18th centuries, influencing colonial expansion and trade practices.
2. Under mercantilism, governments actively regulated the economy, often supporting monopolies and granting charters to trading companies.
3. The theory posited that wealth was measured by the amount of gold and silver a nation possessed, leading to aggressive policies aimed at accumulating precious metals.
4. Mercantilist policies often resulted in competition among European powers for colonies, resources, and trade routes.
5. Criticism of mercantilism eventually led to the rise of classical economics, with thinkers like Adam Smith advocating for free trade and market competition.

Review Questions

• How did mercantilism influence the development of international trade policies during its peak?
  • Mercantilism heavily influenced international trade policies by promoting the idea that nations should export more than they import to build wealth. This led governments to implement protective tariffs, subsidies for exporters, and strict regulations on imports. The focus on accumulating precious metals drove countries to seek colonies rich in resources, further shaping global trade dynamics during this period.
• Evaluate the effectiveness of mercantilist policies in achieving their intended economic goals.
  • Mercantilist policies were effective in fostering national industries and creating powerful trading empires; however, they often resulted in conflict and competition among nations. The aggressive pursuit of favorable balances of trade sometimes led to wars over territory and resources. While these policies strengthened certain economies temporarily, they ultimately stifled innovation and competition, setting the stage for new economic theories that emphasized free trade and market principles.
• Critically analyze how mercantilism laid the groundwork for modern economic theories such as capitalism and free trade.
  • Mercantilism laid important groundwork for modern economic theories by highlighting the significance of trade and wealth accumulation but also exposing its limitations. While it advocated for state intervention and control over trade, it also sparked debates about individual enterprise and market freedom. Thinkers like Adam Smith critiqued mercantilism's focus on zero-sum trade dynamics, paving the way for capitalism's emphasis on free markets and voluntary exchange. This evolution marked a shift toward recognizing the benefits of competition and innovation in driving economic growth.

Related terms

Balance of Trade: The difference between the value of a country's exports and the value of its imports, used as an indicator of economic health.

Protectionism: Economic policy of restraining trade between countries through tariffs, quotas, and other government regulations to protect domestic industries.

Colonialism: The practice of acquiring and maintaining colonies or territories for economic exploitation and political control.