International Trade

Apr 22nd, 2015
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Mercantilism, which was mainly practiced in Europe, argued that economic prosperity could only be achieved through a positive balance of trade primarily of finished good where a country had to limit its imports and encourage exports so as to maximize the quantity of gold in the home country. However, this theory experienced strong criticism from David Hume and Adam Smith, who were considered the fathers of anti-mercantilism thought (Johnson 2005, 34).

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INTERNATIONAL TRADEBy (NAME)CourseProfessorUniversityDateWord count: 3020 wordsQuestion 1 International Trade.a) Critics of mercantilism Mercantilism, which was mainly practiced in Europe, argued that economic prosperity could only be achieved through a positive balance of trade primarily of finished good where a country had to limit its imports and encourage exports so as to maximize the quantity of gold in the home country. However, this theory experienced strong criticism from David Hume and Adam Smith, who were considered the fathers of anti-mercantilism thought (Johnson 2005, 34). David Hume argued that despite the mass exporting in exchange of gold holdings, Britain could not enhance its wealth; this is because, price change in a country is directly proportional to changes in money supply. When a country increases its net exports, more gold would flow into the country in form of payment for the exported goods (Hume 2013, 76). Consequently, prices of goods in home country will rise thus increase in gold holdings will not automatically increase a country's wealth, this he explained through monetarist theory of money. He indicated that increase in domestic prices would hinder exportation while encouraging importation through price adjustment mechanism called specie-flow mechanism thus the amount of exports limited would exceed the limit on amount of imports. Adam smith criticised mercantilism basing his arguments on free trade. Smith di

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