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The theory of mercantilism

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The theory of mercantilism

International trade is a transactional exchange across territories or physical geographic boundaries of capital goods and services for profits. The purpose of international trade is to enable domestic production within a particular country to be sold in other markets other than its own (Viner, 2016). International trade is desired as it enables a country to grow its gross domestic product (GDP) (Thomas, 2019). Therefore, individual countries seek a bigger share and dominance in order to rapidly grow their GDP. However, international trade is complex to navigate and represented by complicated vested interests (Viner, 2016). Salient theorists have thus come up with theoretical frameworks to help counties to format a strategy of succeeding in international. This paper reviews the meaning and functionality of the theory of mercantilism in the context of international trade.

The theory of mercantilism holds that the treasure of a country is directly proportional to its treasure. This treasure is usually held in terms of gold. The general functional principle of the theory of mercantilism is that the exports of a country should exceed its imports (Thomas, 2019). If a country is successful in exporting more than what it imports, in the long run, it will receive more gold from other countries than it gives out. The net effect is the accumulation of gold over a given period of time, running other countries into deficits. In order to perpetuate such a structure for international business, it is incumbent on a government to develop and import strict restrictions on what it imports (Magnusson, 2019). Also, depending on competition from other countries, if a product cannot complete both within the export and domestic markets, the government will offer a subsidy (Thomas, 2019). As such, governments impose trade tariffs and protectionism as a way of protecting domestic Industries and increasing their stocks of gold. In summation, as an economic theory, mercantilism seeks to regulate trade and economy of a particular country such that it can be able to protect its domestic industry and market at the expense of international trading partners (Viner, 2016). An example of mercantilism at work is the ‘Salt Tax Revolt’ in the 1930s in India (Thomas, 2019). Led by Gandhi, Indians held protests against the salt tax. The British Empire has restricted traders and consumers from purchasing salt produced from domestic industries in India through a prohibitive tax that essentially made salt imports from the UK cheaper.

Balance of Trade

The theory of mercantilism presents two scenarios; a favorable and unfavorable balance of trade in international trade. A favorable balance of trade is such that an international trading partner represented by a particular country is exporting more capital, goods, and services than it is importing (Viner, 2016). On the other hand, an unfavorable balance of trade is represented by a situation where the particular government receives more imports than its exports. A favorable balance of trade will result in a trade surplus while the unfavorable balance of trade will result in a trade deficit (Magnusson, 2019). Generally, governments engaging in international trade want to run a trade deficit because it enables them to enjoy a favorable balance of trade. According to the theory of mechanism, search the government will enjoy a surplus in gold reserves (Viner, 2016). However, it is not always advantageous to run a favorable balance of trade. In practice, countries that run trade surpluses end up importing relatively inferior goods and services. It is a process that inevitably grants deficit countries some trade credits. If the credits granted do not amount to sufficient amounts able to buy goods and services, it becomes a disadvantage to countries running trade surpluses.

International trade involves markets with complex structures and policies that general exercise protectionism. The theory of mercantilism seeks to afford governments an upper hand in trading balances. It states governments with trade surpluses run advantages in international trade because they receive more gold or value than countries that run deficits.

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