Brief Notes on Mercantilism Theory of International Trade

The key mistake or inherent inconsistency in mercantilist thinking was the belief that trade as a zero- sum game or win-lose sport. It means that one nation’s gain is loss for another. Running a favourable balance of trade for a long time is also not favourable.

Due to surplus gold and silver reserves would increase, leading to increase in money supply and thereby lead to inflation. Reverse will be the process for unfavorable surplus nation. Thus, to think that trade surplus will go on forever is a mistake. Despite the conclusion, the mercantilism is by no means dead. Even in 21st Century, nations liberalize in the areas they have competitive advantage and resist wherein they are less competitive.

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‘Trade is the name of the game of a win-win situation. It is not a football game, where both try to score over other; but a dance, where everyone tries to be in synchronisation.’

Recently, the term neo-mercantilism has been coined. The term describes the approach of having favourable trade balance to achieve social and political objective(s). A nation may produce more than the domestic demand and the home government may grant aid or loan to other country to exercise political influence over that country.