Chap002 - Chapter 02 Early Trade Theories Mercantilism and...

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Chapter 02 - Early Trade Theories: Mercantilism and the Transition to the Classical World of David Ricardo CHAPTER 2 EARLY TRADE THEORIES: MERCANTILISM AND THE TRANSITION TO THE CLASSICAL WORLD OF DAVID RICARDO Learning Objectives: To learn the basic concepts and policies associated with Mercantilism. To understand Hume’s price-specie-flow mechanism and the challenge it posed to Mercantilism. To grasp Adam Smith’s concepts of wealth and absolute advantage as foundations for international trade. I. Outline Introduction - The Oracle in the 21 st Century Mercantilism - The Mercantilist Economic System - The Role of Government - Mercantilism and Domestic Economic Policy The Challenge to Mercantilism by Early Classical Writers - David Hume – The Price-Specie-Flow Mechanism - Adam Smith and the Invisible Hand Summary II. Special Chapter Features In the Real World: Mercantilism is Still Alive Concept Box 1: Capsule Summary of the Price-Specie-Flow Mechanism Concept Box 2: Concept Review – Price Elasticity and Total Expenditures Titans of International Economics: Adam Smith (1723-1790) III. Purpose of Chapter The purpose of this chapter is to trace out some of the early ideas regarding the basis for international trade and the distribution of the benefits to be gained from trade. The chapter not only provides some historical perspective to trade theory, but it also makes clear why certain contemporary protectionist attitudes can be seen as being based in a Mercantilist view of the world. 2-1
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Chapter 02 - Early Trade Theories: Mercantilism and the Transition to the Classical World of David Ricardo IV. Teaching Tips A. It is important to focus on the principal tenets of the Mercantilist system and then to examine the policy positions that follow logically. This provides a good background for evaluating various trade policy positions later in the book. B. We feel that this is an excellent time to introduce the labor theory of value. It is a good opportunity to help the student begin thinking in relative terms. It is therefore important that the relative nature of this concept is clear in the students’ minds. C. Once the Mercantilist position is laid out and the economic policy implications discussed, one can examine how Hume’s price-specie-flow mechanism and Smith’s ideas of the mutual gains from trade based on absolute advantage contributed to the decline of the Mercantilist way of thinking. D. Discussing the price-specie-flow mechanism at this point gives the student an early insight into the macro aspect of international trade that often gets short shrift when the micro focus of Classical comparative advantage is introduced. V. Answers to End-of-Chapter Questions and Problems 1. Wealth was viewed as synonymous with holdings of precious metals. Nation-states wished to become wealthy and this meant obtaining large holdings of precious metals. It is also argued by some that the shortage of coinage constrained the growth of these nation-states and
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Chap002 - Chapter 02 Early Trade Theories Mercantilism and...

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