Chapter 2 Flashcards
When was mercantilism advocated
17th and 18th centuries
Who wrote the essays, pamphlets on international trade that advocated mercantilism
Merchants, bankers, government officials, and philosophers
Mercantilists definition of rich was
Exports > imports
According to Mercantilists, What will the export surplus result in
Inflow of gold and silver
According to the mercantilists, the more gold and silver a nation had
The richer and more powerful it was
Who had to stimulate the nation’s exports and discourage imports
The government
How did mercantilists measure wealth of nation
By stock of metals it possessed
How measuring wealth today differs from how mercantilists used to measure wealth
Wealth is measured by its stock of humans, goods, and services to satisfy human wants .
Trade zero sum game
A nation could gain in trade only at expense of other nations
How did Adam Smith see the trade between two countries
Both nations must gajn
Which group of Economists advocated the policy of laissez-faire?
Classical Economists
According to classical Economists, free trade would
Cause world resources to be utilised efficiently
Assumptions of the trade based on absolute advantage theory
1) No international mobility of factors but free mobility within the nation
2) Two nations, two-good world
3) Perfect competition
4) No transportation costs
5) Labour theory of value
6) no trade restrictions
According to Adam Smith, trade between two nations is based on
Absolute advantage
Define Absoulte advantage
Producing commodities more efficiently over another nation
According to Adam Smith, if one nation has an absolute advantage over another in the production of good 1 but has an absolute disadvantage in producing good 2 then
Both nations can gain by specialising in the production of the commodity of its absolute advantage and exchanging part of its output
Labour theory value
Commodities were valued relatively in terms of their relative labour content.
If the domestic exchange rate in the US is 6w:4c in absence of trade and in presence of trade the US has an international exchange rate of 6w:6c if the US exchanged wheat for cloth internationally then the US will gain how many?
(Knowing that commodities are valued according to the Labour value theorm)
The US will gain 2C or save 1/2 hour of labour time (since the US can only exchange 6w for 4c domestically)
If the domestic exchange rate in the UK is 1w:5c in absence of trade, and in presence of trade the Uk has an international exchange rate of 6w:6c if the Uk exchanged cloth for wheat internationally then the UK will gain how many?
(Knowing that commodities are valued according to the Labour value theorm)
The UK will gain 24C or saves almost five labour hours
Mercantilist advocated _____________
Government intervention in all economic activities and trade
