BAR11S.6IE - Dr. Christine M. Shaw [BAR11.6IE]...

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Dr. Christine M. Shaw [BAR11.6IE] International Economics Outline for Week 2 I. Week 1 “highlights” II. Historical perspective A. Acknowledge that there are benefits or gains from trade → the next task is to clarify the basis for these gains (numerically or graphically) and to try to explain trade patterns or who trades what and with whom → all of this is the subject matter of trade theory B. Mercantilism 1. Mercantilism – which prevailed in the 17 th and 18 th centuries – argued that exports should be promoted and imports minimized a. This would lead to a favourable trade balance and enable the country to accumulate gold and silver b. This increased wealth would lead to greater spending within the economy and, therefore, to a rise in domestic output and employment 2. To achieve a favourable trade balance (exports > imports) → mercantilist recommended government regulation of trade via tariffs, quotas and other commercial policies a. In this scenario, one country can only reap gains from trade at the expense of another country b. By the mid-18 th century, two major intellectual arguments against mercantilism came from David Hume and Adam Smith C. Writing in 1752, Hume developed a theory called the “specie-flow doctrine” 1. The basic idea is that a favourable trade balance → generates an inflow of gold and silver into England a. This gold and silver becomes part of the English money supply → the amount of money in circulation ↑ b. English price level ↑ → this encourages the purchase of foreign goods (which have become relatively cheaper) and discourages exports (which have become relatively more expensive for the rest of the world) c. The English trade surplus is, therefore, eventually eliminated 1
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2. What is important about this argument from our current perspective is that
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BAR11S.6IE - Dr. Christine M. Shaw [BAR11.6IE]...

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