Theory of Mercantilism
Discussion Question 2 (50 points)
In a short essay, discuss the theory of mercantilism, and discuss favorable and unfavorable balances of trade as they apply to international business. (A 2-page response is required.)
Mercantilism theory is a term that focuses on the industrial model, particularly on the financial system of trade, which spans from the 16th to 18th century. The model is founded on the standard that abides by the global wealth is static. Subsequently, most European countries have tried to accrue the most substantial probable share, exploiting their exports by restricting their imports via tariffs. As aligned to the model, different countries must export more than focusing on imports, effectively resulting in change and run of deficits (Rössner, 2020). To increase exports, a country must abide by import government-imposed restrictions that could subsidize based on products that can otherwise compete for domestic or export markets.
Mercantilism was among the central models used in Europe between 16th and 18th centuries. The model was developed due to most countries opting to focus on their export rather than imports. The theory was a type of economic nationalism used to increase a country’s power and prosperity through restrictive trade strategies. Its primary objective was to significantly increase the state’s silver and gold supply with exports instead of depleting it through imports. Also, it was applied to supporting domestic employment. Mercantilism was based on the producers’ and merchants’ interests and offered protection for their activities. The model had countless attributes, including the belief in the static nature of wealth. During this period, financial wealth was perceived as restricted because of the precious metals’ rarity. Hence, the countries that sought power and prosperity required secure wealth at the expense of other countries. Another characteristic is the demand for increasing gold supply (Rössner, 2020). In the 16th century, gold represented power and wealth since it was used as a form of payment for various amenities. A lack of gold implied the nation’s downfall. Another significant attribute of mercantilism is the need to sustain the trade surplus. Maintaining a trade surplus was essential to building the required wealth. Countries must focus on marketing their exports more than spending their resources on imports. Other parameters consisted of using colonies to support wealth, the significance of a large population, and the utilization of protectionism.
A favorable balance of trade indicates that the country is exporting more than it imports, while an unfavorable balance implies importing far more than it is exporting. In any trade, there is a requirement to assess imports and export as they are valuable in determining their impact on the market, organization, and demand, which are critical for any business allowance. Most of these aspects are credited, such as how high the firm creates its policies with the sense that imports and exports must have service access. Nonetheless, a country running on a surplus platform should focus on the favorable balance of trade which guarantees that importing goods and services have less value than exporting them.
In effect of this surplus, the nation must grant credit to the deficit nation where the credit cannot purchase products and services based on the favorable trade balance. Thus, if the nation’s exports surpass its imports, it is perceived to have a favorable balance of trade, or its trade must be surplus. Nevertheless, if the imports surpass exports, then an unfavorable balance of trade exists or a trade deficit as aligned with the economic theory of mercantilism that triumphed in the success of Europe in the 16th century leading to a favorable balance of trade that is essential for financing a nation’s purchase of foreign goods (Magnusson, 2019). For the prevailed and complete favorable and unfavorable balance of trade, there is a requirement to focus on colonies that set up the product purchase per the export of its raw materials. The country’s wealth is determined by facts linked to a favorable and unfavorable balance of trade.
References
Magnusson, L. (2019). Mercantilism. In The Elgar Companion to John Maynard Keynes (pp. 296-301). Edward Elgar Publishing.
Rössner, P. R. (2020). Freedom and Capitalism in Early Modern Europe: Mercantilism and the Making of the Modern Economic Mind. Palgrave Macmillan.