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7/31/2019 Mercan Talism

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INTERNATIONAL FINANCE & MANAGEMENT

PRESENTED TO:

PROF. SARFARAZ ANSARIFACULTY (IFM)

PIMR, INDORE


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MERCANTALISM

THEORY


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Model was given by William Petty, Thomas Mun and Antoine de

Montchrtien.

It is a philosophy from about 300 years ago.

The base of this theory was the commercial revolution, the

transition from local economies to national economies, from

feudalism to capitalism, from a rudimentary trade to a larger

international trade.

HISTORY:


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Mercantilism was the economic system of the major trading nations

during the 16th, 17th, and 18th century, based on the premise that

national wealth and power were best served by increasing exports

and collecting precious metals in return.

It superseded in Western Europe where the policy was to export in

the countries that they controlled and not to import in order to have

positive BOP.

Geographical discoveries: Stimulated international trade as well as

produced an affluent flow of gold and silver- encourage money and

price based economy.

PHILOSOPHY:


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The theory states that the world only contained a fixed amount of

wealth and that to increase a country wealth; one country had to

take some wealth from another, either through having a higher

import/export ratio.

So, this tendency, to export more and import less and to receive in

exchange gold (the deficit is paid in gold) is called

MERCANTILISM.

The theory was criticized by the newly appeared class. More money

was associated with less products and inflation. The standard of

living is weaker.

Industrial revolution- Absolute advantage theory.


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Important assumptions of comparativeadvantages theoryTo simplify analysis the following assumptions should be held.There are no transport costs.

Costs are constant and there are no economies of scale.

There are only two economies producing two goods.

The theory assumes that traded goods are homogeneous.

Factors of production are assumed to be perfectly mobile withina country but no movement internationally.

There are no tariffs or other trade barriers.


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Basic principle of

comparative advantages theory

For the country enjoying overall advantages in the both industries, choose one in which it

is comparatively more advantageous, while for the other country with overall

disadvantages in the both industries, choose one in which it is comparatively less

disadvantageous.


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Gains from Comparative Advantage

Even if a country had a considerable absoluteadvantage in the production of both goods, Ricardo

would argue that specialization and trade are stillmutually beneficial.

When countries specialize in producing the goods in

which they have a comparative advantage, they

maximize their combined output and allocate theirresources more efficiently.


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CLASSICAL TRADE THEORIES HECKSCHER-OHLIN THEORY[ H O MODEL ]

(Eli Heckscher & Bertil Ohlin - Stockholm School of Economics, 1933)

A general equilibrium mathematical model of

International Trade

It builds on David Ricardos theory of

comparative advantage by predicting patterns of

commerce and production based on the factor

endowments of a trading region.

The model essentially says that countries willexport products that utilize their abundant and

cheap factor(s) of production and import

products that utilize the countries' scarce

factor(s).


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CLASSICAL TRADE THEORIES HECKSCHER-OHLIN THEORY


Relative endowments of the factors of production

(land, labour and capital) determine a country's

comparative advantage.

Countries have comparative advantages in thosegoods for which the required factors of production are

relatively abundant locally. This is because the pricesof goods are ultimately determined by the prices of

their inputs.Goods that require inputs that are locally abundantwill be cheaper to produce than those goods that

require inputs that are locally scarce.


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Capital Intensive & Labour Intensive Goods:A country where capital and land are abundant but labor is scarce will havecomparative advantage in goods that require lots of capital and land, but littlelabour - grains, for example. If capital and land are abundant, their prices will below. As they are the main factors used in the production of grain, the price of grainwill also be low - and thus attractive for both local consumption and export. LabourIntensive goods on the other hand will be very expensive to produce since labor isscarce and its price is high. Therefore, the country is better off importing thosegoods.

The Labour-rich countries export labour intensive goods whilethe Capital-rich countries export capital intensive goods andthus, international trade takes place.


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Assumptions of H-O Model:

Both countries have identical production technology

Production output must have constant Return to ScaleThe technologies used to produce the two commoditiesdifferLabor mobility within countriesCapital mobility within countries

Capital immobility between countriesLabour immobility between countriesCommodities have the same price everywherePerfect internal competition

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