Mercantilism

Definition

Mercantilism is an economic theory and practice that emphasizes the accumulation of wealth, usually in the form of gold or silver, by a nation through a positive balance of trade with other nations. It was a dominant economic philosophy in Europe from the 16th to the 18th century.

5 Must Know Facts For Your Next Test

1. Mercantilists believed that a country's wealth and power were best served by maintaining a positive balance of trade, with exports exceeding imports.
2. Mercantilist policies often included the use of tariffs, quotas, and other trade barriers to restrict imports and promote domestic industries.
3. Mercantilists viewed colonies as a means to secure raw materials, provide markets for exports, and increase the nation's overall wealth and power.
4. The pursuit of a positive balance of trade led mercantilist nations to encourage exports and discourage imports, often through the use of subsidies and other interventionist policies.
5. Mercantilism was challenged by the emergence of classical economic theory, which advocated for free trade and the principle of comparative advantage.

Review Questions

• Explain how mercantilism relates to the concept of protectionism and its impact on consumers and producers.
  • Mercantilism is closely tied to the concept of protectionism, as mercantilist policies often involved the use of tariffs, quotas, and other trade barriers to restrict imports and promote domestic industries. This protectionist approach aims to maintain a positive balance of trade, which was a key goal of mercantilism. However, these policies can have negative consequences for consumers, who may face higher prices and less choice, while providing an indirect subsidy to domestic producers who are shielded from foreign competition.
• Discuss the tradeoffs of mercantilist trade policies in the context of the broader economy.
  • Mercantilist trade policies, while potentially benefiting certain domestic industries, can also create significant tradeoffs for the broader economy. While these policies may increase the wealth and power of the nation through a positive balance of trade, they can also lead to higher consumer prices, reduced consumer choice, and potential retaliation from trading partners. Additionally, the focus on accumulating wealth, often in the form of gold or silver, can distort economic incentives and lead to inefficient allocation of resources. The emergence of classical economic theory, which advocates for free trade and the principle of comparative advantage, challenged the mercantilist approach and highlighted the potential benefits of a more open and competitive global economy.
• Evaluate the long-term implications of mercantilist policies on a country's economic development and international relations.
  • In the long run, the pursuit of mercantilist policies can have significant implications for a country's economic development and international relations. While the short-term focus on maintaining a positive balance of trade and accumulating wealth may provide some immediate benefits, the distortions and inefficiencies created by these policies can ultimately hinder a country's economic growth and competitiveness. Additionally, the use of trade barriers and other protectionist measures can lead to retaliation from trading partners, escalating trade tensions and potentially damaging diplomatic relations. The shift towards more open and market-based economic policies, as advocated by classical economic theory, has generally been seen as more conducive to long-term economic prosperity and stable international cooperation.

Related terms

Protectionism:

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

Balance of Trade:

The difference between a country's imports and exports, calculated by subtracting the value of imports from the value of exports.

Tariffs:

A tax imposed on imported goods, designed to raise the price of those goods in the domestic market and make them less competitive compared to domestically produced goods.