Economics Of Globalization

Mercantilism

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One of the most vital economic systems which were used during the sixteenth and the eighteenth century is known as Mercantilism. The main objective of Mercantilism was to augment the wealth of the nation by imposing government guideline concerning all of the profitable interest of the nation.  It was supposed that nationwide strength could be exploited by restrictive imports through tariffs and by maximizing exports (Queralt, 2015).

Mercantilism is also known as commercialism. It is a system in which a country endeavors to a mass prosperity via trade with other nations, where export exceeds the imports and in turn increasing the stores of gold and costly metals. Now days it is considered as a system which is out of date (Heckscher, 2013).

The term mercantilism has come from a Latin word where “mercan” means buyer. The government trade is encouraged by mercantilism which in turn helps in regulating wealth. Even though mainly discarded today, it was the major school of financial thought from the 15th through the 18th Centuries. The term “Mercantile System” was coined by Adam Smith, also known as the father of Economics. It was invented mainly to explain the political system that required enriching the country by limiting imports and encouraging exports (Vaggi & Groenewegen, 2016).

Figure 1: Mercantilism

The Western part of the European economics was subjugated by this system. During this period, the armed conflict between nation-states was both more recurrent as well as more widespread than any other time in the past.  The armed forces and navies of the major characters were no longer provisional forces hoisted to tackle a precise threat or purpose, but were full-time specialized forces. The most important financial objective of each of the administration was to control an adequate quantity of hard coinage in order to sustain a military that would discourage attacks (Stern & Wennerlind, 2013).

Most of the policies of the mercantilist include the development of the relationship between the governments of the nation-states as well as the merchant classes. During the mercantile period, distribution was very important. With the enlargement of colonies and the consignment of gold from the New World into Spain and Portugal, organizing of the oceans was measured fundamental to nationwide power. Mercantilism was a response adjacent to the financial problems of previous times when states were too frail to direct their financial systems and when every municipality or principality charged its own tariffs on merchandise passing through its borders (Reinert & Carpenter, 2014).

The essence of mercantilism was referred to as the bullionism. In order to ensure the economic prosperity of the economy it is very important to make few imports and many exports. This in turn creates a generation of net inflow of foreign exchange and in turn maximizes the gold stockpile of the country. These ideas are quite attractive to the government (Smith, 2014).

The absolute advantage is the capability of a country and an individual as well as a company in order to manufacture commodities or services at a subordinate cost per unit than the cost at which any other unit produces those commodities or services. Entities possessing absolute advantages have the capability to produce a commodity by using less number of inputs and or using more effectual process than a different party producing the similar manufactured goods or service (Schumacher, 2012).

Absolute Advantage

Figure 2: Absolute Advantage

Absolute advantage refers to the capability of a unit in order to produce a larger quantity of a commodity. Absolute advantage is defined by Adam Smith in terms of International Trade.  Labour is the only input which is used. It mainly contrasted with the concept of comparative advantage (Seretis & Tsaliki, 2015).

In the year 1700, the father of economics Adam Smith taught that the states should discover out what they can manufacture more proficiently and then focus in what they do most excellent while dealing with other states who are also doing what they are best at. A unit can have an absolute advantage in more than one commodity or service. It helps in explaining why it makes intellect for countries as well as individuals and businesses to deal with each other. Since each nation has advantage in producing a particular good, that nation can benefit from deal (Feenstra, 2015).

Absolute advantage is a condition that takes place in comparative advantage theory. It takes place when one country can generate more of a given goods with same or less resources than the different country. From the above diagram it can be seen that Country A has absolute advantage over olives as compared to that of Country B which has an absolute advantage over oranges. Thus Country B should focus and trade. As per the figure, Country A will not able to generate as much oranges as compared to Country. With the fixed possessions, Country A can create 20 units of olives while Country B can generate only five units. However, Country B can produce fifteen units of oranges as compared to that of Country A which can produce only three units. Thus, from the above diagram it can conclude that Country B should produce oranges and Country A can produce olives and trade them with each other (Valenta, 2014).

Absolute advantage does not unavoidably denote a financial system should manufacture that good. This necessitates a country to have a comparative advantage. For instance, one state may have an absolute advantage in a lot of goods but it is not sensible to attempt and create the whole thing. It is better to concentrate on merchandise where an individual have an absolute advantage (Cuñat & Melitz, 2012).

When the firm or an entity can generate goods or services at lower opportunity cost, it leads to comparative advantage. It gives the industry the capability to sell commodities or services at a lesser price than its contestants and comprehend stronger sales margins. The entire focus of the country depends on the comparative advantage or disadvantage (Costinot et al., 2013).

The slope of a production possibility curve reflects the opportunity cost of production. Raising the production of a particular good means that less of the different can be generated. Ceterbis paribus means that presumptuous there is no precise information known that can be determined by the relative advantage of production of each country in a convinced group by looking at the slope of the PPCs. As per the diagram, the PPC of Country A is evidently steeper than that of the PPC of Country B. This means that Good A is given up more quickly as the country tries to augment the production of Country B. As a result, the opportunity cost of generating good A for the country A is much more than producing the good for Country B (Maneschi, 2013).

Comparative Advantage

Figure 3: The Comparative Advantage

The theory of Comparative advantage reflects the method by which the world is becoming an international trading market. Economic theory proposes that, if states relate the standard of comparative advantage, collective output will be greater than before in contrast with the output that would be shaped if the two states attempts to become autonomous and assign possessions towards manufacture of both goods. Let us assume an example. Suppose there are two countries that are UK and Australia. They both produce textiles and books. The level of production is shown in the below table:

 
In case of UK in order to produce one unit of textile it has an opportunity cost of four books. However, in case of Australia in order to produce one unit of textile it has an opportunity cost of 1.5 books. The above is an example of production without trade. 

However the principle of comparative advantage can be criticized in the following ways:

• It may exaggerate the advantages of specialization by paying no attention to a number of costs. 
• The theory also supposes that markets are completely competitive- in particular, there is perfect mobility of features without any retreating profits. However, the reality is likely to be diverse with production from factor inputs which are subject to diminishing returns.

The limitations are as follows:

1. It does not take into report the cost of global transportation
2. Trade flows are distorted by the limitations of tariffs and import
3. Scale finances can bring about extra efficiencies
4. The services are not traded internationally
5. The large scale of production in certain companies results in economics of scale, lower prices and in turn counterbalance weak domestic comparative advantage
6. The public sector can target and spend in certain industries, build communications as well as provide financial supports. This in turn serves in order to boost the comparative advantage of the firms (Feenstra, 2015).

The limitations of Mercantilism are as follows:

1. The emphasis which was mostly put on money was one of the limitations of Mercantilism. The merchants put much stress on silver and gold which in turn was never accurate prosperity of a nation. The true prosperity of the nation was natural resources and industrial units. However, Mercantilism ran behind gold and silver and in turn was not able to serve the individuals appropriately.
2. Due to Mercantilism, clash took place among the European countries. Each country competed in order to become more influential as compared to other.
3. Colonialism took place due to Mercantilism. Markets were needed by the European countries in order to sail their surplus. Germany, Italy, Spain, France and Portugal were also in the race. This in turn led to hostility mong the diverse countries (Atkinson, 2014).
4. Mercantilism was also a one way passage. It mainly put the stress on export rather than import. It is quite difficult to be self sufficient.
5. There did not exist any requirement on the part of the state to obstruct in trade and business. However, it hindered in human rights. As a result, both Adam Smith and the Physiocrats highlighted on Free Trade.
6. Mercantilism, besides putting emphasis on trade and commerce also deserted other characteristics of life which included education and agriculture. This was one of the major limitations of Mercantilism.
7. It was also found that Mercantilism followed strong opinion that a state can increase at the awareness of the other. However, it was not acceptable. The reason was that it stressed the relation between two states (Greenfeld, 2014).

The limitations of absolute advantages are as follows:

1. More factors of production – in the real world, goods are produced with the help of several factors which includes capital, land and labour. In that circumstance, a product cannot be ranked as per the absolute advantage as their manufacture in one state requires more of one input and at the same time less of a different input than in a different state.
2. Inter-industry trade versus intra-industry trade – in the inter-industry trade one type of god is exchanged for another type of good. Most of the countries gets engaged in the intra-industry trade in which the similar types of goods are exchanged. As a result, the intra – industry trade is becoming more significant.
3. It assumes that labor can toggle between commodities without difficulty and they will work with same competence, which in actuality cannot take place (Handel, 2013).
4. The theory of absolute advantage does not take into account the cost of transportation which is involved in selling the goods in the global market ()

The limitations of comparative advantages are as follows:

1. The theory of comparative advantage is based on an untrue assumption that wages between industries do not differ. It has been reported that the construction and production workers are paid more as compared to that of the retail workers. Even the employees having the same skills receive diverse wages in diverse division of the economy. In that case, if the economy specializes in the low wage sector, it will hurt the employees moving from high wage sector to low wage sector (Chagnon et al., 2013).
2. The nature and organization of certain industries may be such that the advantages from trade may accumulate only to extremely few of the workers. This may lead to worsening the situation as the preponderance of workers will be worse off in spite of deriving aggregate gains from trade.
3. The different goods have diverse elasticity of demand. In rough economic times when international demand may be declining, a financial system specializing in creating jewelry, for example, may find it complicated to deal its products to hoist sufficient money to import foodstuff (Stewart & Shamdasani, 2014).
4. Comparative advantage measures stationary advantage but not any self-motivated advantage.
5. One of the most vital limitations of this theory is that it assumes constant returns to scale. It has been argued that if a country specializes in wine, then why the country will produce wheat. The country in turn will import wheat rather specialize in that. In reality, a country produces a meticulous product and also imports a part of it. However, this occurrence was not explained by the theory of comparative advantage (Copeland & Taylor, 2013). 

References

Atkinson, R. D. (2014). The Rise of Innovation Mercantilism. The International Economy, 28(2), 30.

Chagnon, P. L., Bradley, R. L., Maherali, H., & Klironomos, J. N. (2013). A trait-based framework to understand life history of mycorrhizal fungi. Trend

Copeland, B. R., & Taylor, M. S. (2013). Trade and the environment: Theory and evidence. Princeton University Press.

Costinot, A., Donaldson, D., Vogel, J., & Werning, I. (2013). DP9765 Comparative Advantage and Optimal Trade Policy.

Cuñat, A., & Melitz, M. J. (2012). Volatility, labor market flexibility, and the pattern of comparative advantage. Journal of the European Economic Association, 10(2), 225-254.

Feenstra, R. C. (2015). Advanced international trade: theory and evidence. Princeton university press.

Feenstra, R. C. (2015). Advanced international trade: theory and evidence. Princeton university press.

Gibbs, C. (2016). âš¡Presentation “International Economics Classical and Neoclassical Trade Theory.”. Slideplayer.com. 

Greenfeld, L. (2014). Mercantilism Reimagined: Political Economy in Early Modern Britain and Its Empire. Edited by Philip J. Stern and Carl Wennerlind (New York, Oxford University Press, 2014) 404 pp. $99.00. Journal of Interdisciplinary History.

Handel, M. J. (2013). Putting tasks to the test: Human capital, job tasks, and wages. Journal of labor Economics, 31(2 Part 2), S59-S96.

Heckscher, E. F. (2013). Mercantilism. Routledge.

lengkapku, L. (2014). 10: Absolute Advantage vs. Comparative Advantage. Grupodiez-irbinus.blogspot.in. 

Maneschi, A. (2013). 10. International trade theory and comparative advantage. Research Handbook on Global Justice and International Economic Law, 274.

Queralt, D. (2015). From Mercantilism to Free Trade: A History of Fiscal Capacity Building. Quarterly Journal of Political Science, 10(2), 221-273.

Reinert, E., & Carpenter, K. (2014). German Language Economic Bestsellers before 1850, with two chapters on a common reference point of Cameralism and Mercantilism. TUT Ragnar Nurkse School of Innovation and Governance.

Schumacher, R. (2012). Adam Smith’s theory of absolute advantage and the use of doxography in the history of economics. Erasmus Journal for Philosophy and Economics, 5(2), 54-80.

Seretis, S. A., & Tsaliki, P. V. (2015). Absolute Advantage and International Trade Evidence from Four Euro-zone Economies. Review of Radical Political Economics, 0486613415603160.

Smith, B. (2014). Mercantilism Reimagined: Political Economy in Early Modern Britain and Its Empire. Edited by Philip J. Stern and Carl Wennerlind. Oxford: Oxford University Press. 2013. Pp. ix, 404. $99.00. The Journal of Economic History, 74(04), 1228-1229.