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Purpose of Chapter The purpose of this chapter is to trace out some of the early ideas regarding the basis for international trade and the distribution of the benefits to be gained from trade. The chapter not only provides some historical perspective to trade theory, but it also makes clear why certain contemporary protectionist attitudes can be seen as being based in a Mercantilist view of the world.
Teaching Tips A. It is important to focus on the principal tenets of the Mercantilist system and then to examine the policy positions that follow logically.
This provides a good background for evaluating various trade policy positions later in the book. We feel that this is an excellent time to introduce the labor theory of value. It is a good opportunity to help the student begin thinking in relative terms. Discussing the price-specie-flow mechanism at this point gives the student an early insight into the macro aspect of international trade that often gets short shrift when the micro focus of Classical comparative advantage is introduced.
Answers to End-of-Chapter Questions and Problems 1. Wealth was viewed as synonymous with holdings of precious metals. Nation-states wished to become wealthy and this meant obtaining large holdings of precious metals. It is also argued by some that the shortage of coinage constrained the growth of these nation-states and that precious metals were required to increase the supply of coinage money in order for the countries to grow. Critical pillars of Mercantilism: a. Because wealth was viewed in terms of holdings of precious metals, the objective of economic activity and policy was to foster increased holdings of specie.
Mercantilists believed that individuals pursuing their own self interest would not accomplish this objective and that, consequently, economic activity had to be closely regulated and supervised.
The paradox of Mercantilism is that wealthy countries would contain large numbers of very poor people. A second paradox is that wealthy countries had to spend great amounts of specie to protect their holdings of specie. Wages were kept low at institutional subsistence levels to reduce labor costs, and families were encouraged to have children through various taxes and subsidies.
These actions contributed to a very large poor working class. Critical assumptions of the price-specie-flow mechanism: a. If the demand for traded goods were price inelastic, the movement of gold and prices would worsen trade balances, not correct them. This would be destabilizing, not stabilizing.
The external payments position had repercussions on internal economic variables. A continual positive trade balance was thus not a viable policy target, and not a continuous source of increased wealth. The United States has an absolute advantage in the production of wheat 3 hrs. Similarly, the United Kingdom would benefit because it takes only 0. United Kingdom consumption of clothing with trade will be the difference between domestic production and exports, i. Thus, with trade, United Kingdom consumption of clothing increased from 75 to 85 units and its consumption of wheat increased from 50 units to 80 units.
Consequently, with trade, U. In this case trade is a positive-sum game since both parties are able to consume more of both goods with trade compared to autarky, i. A Mercantilist would view the continuing trade surplus as a very desirable outcome, since it produces a net increase in Chinese holdings of foreign exchange claims on foreign country assets which is similar to increased holdings of specie in Mercantilist times.
To the Mercantilist, the surplus represents successful Chinese policy, not a problem. Hume would argue that the situation would be self-correcting if a fixed exchange rate system is in place as long as prices and wages are flexible and China does nothing to interfere with the flow of payment and its impact on the money supply. The increase in the money supply accompanying the trade surplus would lead to a relative increase in the prices of Chinese goods, thus reducing the trade surplus.
Movement to a zero trade balance would also occur under a flexible-rate system because the trade surplus would lead to an increase in the value of the Chinese currency and therefore to a relative increase in the prices of Chinese goods and services. With a price elasticity of demand of - 2. Because Switzerland was initially exporting 5, units, the new level of exports will be 4, [ 5, 1 - 0.
The new value of Swiss exports will be , francs [ 4, ], which is exactly equal to its new level of imports. The increase in Swiss prices has thus worked to remove its trade surplus with Spain. In the alternative case, with a price elasticity of demand for Swiss exports of - 0. The initial export of 5, units decreases by 2 percent of 5, or by units, to a quantity of 4, units.
The new value of Swiss exports to Spain will thus be , francs [ 4, ]. Sample Exam Questions A. Essay Questions 1. Explain how the price-specie-flow mechanism operates to maintain balanced trade between countries. Why was a positive trade balance so important to Mercantilists? In Mercantilist thinking, why did a positive trade balance not result in domestic inflation and a loss of international competitiveness?
What were the critical foundations of Mercantilist thought? What trade policies resulted from this way of thinking? Explain what is meant by a zero-sum game, and why it was central to Mercantilist thinking. During the campaigns for nomination for president of the United States, the point was frequently made that the United States was losing from trade with any given country if the United States had a trade deficit with that country.
Using material from this chapter, assess this position. Multiple-Choice Questions 7. According to the labor theory of value, a. If the demand for traded goods is price-inelastic, the price-specie-flow mechanism will result in a. Which of the following policies would NOT be consistent with the Mercantilist balanceof-trade doctrine?
The price-specie-flow mechanism suggested that a. The policy of minimum government interference in or regulation of economic activity, advocated by Adam Smith and the Classical economists, was known as a. There is a decrease in the money supply in the deficit country.
There is an increase in the price level in the surplus country. There is an increase in real income in the surplus country. Further, the demand for traded goods is assumed to be with respect to price. Given the following Classical-type table showing the number of days of labor input required to obtain one unit of output of each of the two commodities in each of the two countries: United States United Kingdom.
APPLEYARD FIELD AND COBB INTERNATIONAL ECONOMICS 7TH EDITION PDF
International Economics Appleyard Field Cobb
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