Mercantilism

Definition

Mercantilism is an economic theory that was prevalent in Europe during the 16th to 18th century. It emphasizes the idea of national wealth accumulation through the establishment of a positive trade balance, often involving exports exceeding imports. This theory typically promotes protectionism and colonialism to secure markets for goods.

Phonetic

The phonetic transcription of the keyword “Mercantilism” is: /mərˈkæntɪˌlɪzəm/.

Key Takeaways

Focus on Wealth Accumulation: Mercantilism promotes the accumulation of wealth, particularly in the form of gold and silver, by the nation using trade. Advocates of mercantilism view the economy as a zero-sum game, where any gain for one party is a loss for another.
Government Intervention: Under mercantilism, the government plays an active role in the economy to protect domestic industries, promote exports over imports, and maintain positive trade balances. This is done by implementing various measures such as tariffs, quotas, and subsidies.
Colonialism and Exploitation: Mercantilism often involved the establishment and maintenance of colonies. Mother countries usually exploited their colonies for cheap raw materials and then sold back finished goods at inflated prices, essentially creating a captive market.

Importance

Mercantilism is significant in the realm of business and finance as it was the leading economic theory in the 16th to 18th centuries, massively impacting global trade and international relations. The principle of mercantilism promotes a positive balance of trade, favoring exports more than imports, thereby accumulating wealth and capital primarily through the mechanism of national gold reserves. This concept shaped the economic policies of many European countries and facilitated intense global competition for colonies and resources. Its effects can still be witnessed today, particularly in countries implementing strict trade restrictions and tariffs. Understanding mercantilism, therefore, aids in comprehending historical and current trade practices and international economic relations.

Explanation

Mercantilism, which prevailed in Europe between the 16th and 18th centuries, is an economic theory that advocates for the role of the state in regulating the economy to accumulate wealth, mainly by increasing exports and limiting imports. The main purpose of mercantilism is to strengthen national economies by amassing capital, particularly precious metals like gold and silver. It aims to establish a favorable balance of trade, where the value of domestic goods exported exceeds the value of foreign goods imported, thereby allowing a country to accumulate wealth.The mercantilist economic policy is used by states to enhance their power and global influence. It enables them to increase their reserves of gold and silver, which is considered a symbol of a country’s wealth and prosperity during the mercantilist period. Furthermore, mercantilism encourages domestic industries by imposing high tariffs on foreign goods and providing government subsidies for local manufacturing sectors. This results in the reduction of reliance on foreign goods, promoting self-sufficiency, and promoting industrial growth and national economic development. This philosophy dictated the economic policy of many nations until it was gradually replaced by the free trade principles of classical economics.

Examples

1. 17th Century England: England adopted a mercantilist policy with its American colonies where it restricted their trade to be only with England. The goal was to increase England’s prosperity. The colonies were permitted to only purchase goods from England, and were required to sell raw materials such as cotton and tobacco to England at agreed prices. This created a trade surplus for England and a mechanism for wealth accumulation.2. Spain and its Latin American Colonies: In its colonial period, Spain applied the mercantilism theory to its territories in Latin America. Spain extracted precious metals like gold and silver and exported them back to Spain. The colonies were mainly markets for Spain’s manufactured goods and a source of raw materials. It was a method for Spain to accumulate wealth at the expense of the colonies.3. France in the era of Louis XIV: Jean-Baptiste Colbert, the controller-general of finance under Louis XIV, implemented policies that are classic examples of mercantilism. He implemented high tariffs on imported goods to protect domestic industries, encouraged domestic industry through state intervention, and sought to increase the accumulation of gold and silver in the country. His main aim was to make France self-sufficient and to increase the wealth of the state by having more export than import.

Frequently Asked Questions(FAQ)

What is Mercantilism?

Mercantilism is an economic theory and practice that was popular during the 16th to 18th century. It advocates the idea that a nation’s wealth can be increased by the government restricting imports and promoting domestic industry, primarily through the use of tariffs and subsidies.

Which period is often associated with Mercantilism?

Mercantilism was most prominent during the economic system of the major trading nations during the 16th, 17th, and 18th centuries, usually associated with the rise of the nation-state.

How did Mercantilism impact international trade?

Under Mercantilism, the government sought to direct all trade through the home country and to promote a positive trade balance. This often led to trade wars and can be seen as a form of economic nationalism.

Is Mercantilism still practiced today?

Mercantilism as a comprehensive principle is no longer practiced today. However, some of its practices such as protective tariffs and import restrictions can still be seen in many countries’ trade strategies today.

What are the main principles of Mercantilism?

The main principles of Mercantilism include a favorable balance of trade, development of domestic industries, high import tariffs, and the belief that colonies exist for the benefit of the mother country.

How does Mercantilism differ from free-trade doctrines?

Mercantilism advocates government regulation to achieve a positive balance of trade, while free-trade doctrines advocate for minimum government intervention in international trade, allowing for trade to be guided by the principle of comparative advantage and market forces.

What are some criticisms of Mercantilism?

Some criticisms of Mercantilism include its disregard for the welfare of consumers, its focus on gold and silver as the only sources of wealth, and its failure to recognize the benefits of free trade.

Who are some key thinkers related to Mercantilism?

Some key thinkers related to Mercantilism include Thomas Mun, Jean-Baptiste Colbert, and William Petty.

What effect did Mercantilism have on the colonies of the major European powers?

In many cases, Mercantilism led to strict control of trade and economic exploitation of colonies by their mother countries. This often resulted in resentment and, in some cases, revolution.

Related Finance Terms

Balance of Trade
National Wealth
Colonialism
Protectionism
Commodity Monopoly

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