Briefly discuss the primary features of the mercantilist philosophy. Mention two major criticisms of the mercantilist theory as put forward by Adam Smith and other economists.
What will be an ideal response?
POSSIBLE RESPONSE: Mercantilist philosophy guided European thinking about international trade for several centuries before Adam Smith published the Wealth of Nations in 1776. Mercantilists considered that international trade could be a major source of benefits to a nation. They also believed that government regulation of trade was necessary to provide maximum benefits. Mercantilists emphasized the accumulation of gold and silver by a country. They believed that exports are beneficial for an economy and imports are harmful. According to them, if a country exports more than it imports then its trading partners would have to pay for their excess purchases with gold and silver. This, in turn, would increase this country's stock of gold and silver and consequently its well-being. Imports were considered to be harmful because they tended to deplete the country's stock of these precious metals. Mercantilists viewed trade as a zero-sum activity. According to them, a country can gain from free trade only at the expense of its trading partners.
Major criticisms, as pointed out by Adam Smith and other economists, include the following:
The well-being of a country is mainly determined by its people's ability to consume products at present and in the future. Imports usually help to expand national consumption and hence need not be suppressed.
Exports are useful because they help to pay for imports. That is, exports are what the country gives up, to get the imports that add to national consumption.
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Assume that the market for barley is in equilibrium and the demand for barley is inelastic. Predict what happens to the revenue of barley farmers if a prolonged drought reduces the supply of barley. The drought will cause farm revenue to
A) fall because of the decrease in the quantity of barley sold. B) rise because there will be a shortage of barley. C) rise because the percentage increase in quantity sold is greater than the percentage increase in price. D) rise because the percentage decrease in quantity sold is less than the percentage increase in price.
Give an example, not similar to the text material, where you made a decision based on your private costs only, and should have made a different decision if all costs had been considered.
What will be an ideal response?
"Certified shade-grown, organic coffee" is an example of requiring home standards in a foreign market instead of trade barriers
Indicate whether the statement is true or false
An increase in a country's saving rate will tend to cause which of the following in the long run?
A. an increase in the unemployment rate B. an increase in the rate of inflation C. an increase in economic growth D. a reduction in per capita real GDP