Leipzig University Faculty of Economics and

Transcript:Leipzig University Faculty of Economics and:
Leipzig University Faculty of Economics and Business Administration Institute for Economic Policy International Economics Kristoffer J. M. Hansen II. Trade Theory: Mercantilism, Smith and Ricardo II. Trade Theory: Mercantilism, Smith and Ricardo Mercantilism Adam Smith and Absolute Advantage David Ricardo and Comparative Advantage Comparative Advantage under Increasing Costs The Heckscher-Ohlin Theory The Alchian-Allen Effect Summary References Pugel, International Economics, pp. 32-66 Russian and German Exports by Commodity in 2007 Source: UN Comtrade Statistics 2009. What characteristics of production help to explain patterns of world trade? 1. Mercantilism Mercantilism is not so much an organized body of thought as a collection of ideas and policies used to interfere with international trade. Especially prominent from the 16th to the 18th century in Europe. The Montaigne fallacy: in trade, the gain of one person or country can only come at the loss of another person or country. “No profit can possibly be made but at the expense of another.” The assumption behind mercantilist policies: a nation’s wealth depends on its stock of precious metals (i.e., money). Therefore, exports should be encouraged and imports discouraged. Mercantilist Practices To encourage exports: Export subsidies, encourage manufacturing, subsidize national shipping (navigation acts). To discourage imports: High tariffs on manufactured goods. Colonies for raw materials (and later: captive markets). Other practices: Chartered companies: Dutch East India Company, English East India Company. Critique of Mercantilism Opposition to mercantilism was widespread, really took off in late 17th century. Jean-Baptiste Colbert (1619-1683), minister to Louis XIV of France whose name became synonymous with mercantilism (colbertisme) thought he improved trade (and enriched the king!); in reality, France became impoverished. Colbert once asked a group of merchants what he could do to help them. The answer was: “laissez faire, laisser passer, le monde va de lui même!” Roughly translated: get out of our way and let commerce and industry develop freely! Critique of Mercantilism What’s so good about accumulating specie (i.e., precious metals)? As we saw earlier, people keep as much cash as they think good; an “adverse balance of payments” can only endure if people desire to reduce their cash holding and export specie. Hume’s price-specie flow mechanism: if you import money, i.e., have a “positive” balance of trade, the money supply increases domestically → higher prices. Then the profit from exporting goods evaporates, foreign goods become relatively cheaper and merchants will import more foreign goods, reversing the “positive” balance of trade.