Mercantilism

Definition

Mercantilism is an economic theory and practice that emphasizes the importance of accumulating wealth, particularly gold and silver, through a positive balance of trade. It advocates for governmental regulation of the economy to enhance national power and limit imports while promoting exports. This approach dominated European economic thought from the 16th to the 18th centuries and laid the groundwork for modern economic policies, influencing the ideas of later economists.

5 Must Know Facts For Your Next Test

1. Mercantilism views national wealth as a finite resource, meaning that one nation's gain is often another's loss, encouraging competition among nations.
2. Under mercantilism, governments sought to control trade routes and establish colonies to secure resources and markets for their goods.
3. The mercantilist approach led to high tariffs on imported goods to protect local industries and reduce foreign competition.
4. Mercantilism heavily influenced colonial policies, as European powers sought to exploit colonies for raw materials while creating markets for their manufactured goods.
5. Adam Smith criticized mercantilism in his work 'The Wealth of Nations,' arguing that true wealth comes from productivity and free trade rather than hoarding precious metals.

Review Questions

• How did mercantilism influence the economic policies of European nations during its dominance?
  • Mercantilism influenced European nations by promoting policies that aimed at increasing national wealth through a favorable balance of trade. Governments implemented protectionist measures such as high tariffs on imports and subsidies for exports to encourage domestic production. This regulatory approach also led nations to seek colonies for resources and markets, resulting in significant competition among European powers for territory and trade dominance.
• Evaluate the role of government intervention in economic activities under mercantilist theory compared to modern economic thought.
  • Under mercantilist theory, government intervention was central to economic activities, with states actively regulating trade to achieve favorable outcomes. This contrasts with modern economic thought, particularly classical economics, which emphasizes minimal government interference and the importance of free markets. Adam Smith argued that individual pursuits of self-interest in free markets lead to wealth generation, challenging the need for strict regulation prevalent in mercantilism.
• Analyze the long-term impacts of mercantilist policies on global trade and economic relationships between countries.
  • The long-term impacts of mercantilist policies on global trade include the establishment of colonial empires and an interconnected world economy based on trade routes and exchanges. These policies laid the groundwork for modern capitalism by highlighting the importance of competition and resource acquisition. However, mercantilism also created tensions and conflicts between nations over trade rights and territorial claims, which have shaped contemporary international relations and trade agreements.

Related terms

Balance of Trade: The difference between the value of a country's exports and imports, where a positive balance indicates more exports than imports, crucial in mercantilist policy.

Protectionism:

Economic policy that restricts imports through tariffs and other regulations to protect domestic industries, commonly associated with mercantilist practices.

Colonialism: The practice of acquiring full or partial political control over another country, exploiting it economically, often driven by mercantilist interests.