Mercantilism: An Old Economic Theory with Modern Relevance, Lecture notes of International Business

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International Trad

Mercantilism

Why do Nations Trade?

(i)Nations are different

• (^) Unequal distribution of natural resources
• (^) Difference in Technology
• (^) Cost Advantages: Cost of production for the same

product differs among different locations

• (^) Different Preferences: Americans prefer Basmati

rice grown in India (taste differences) Due to

different income levels (ii) To achieve economies

of scale in production

• Features of a Mercantilist Economy:
  1. Import prohibition of certain goods using imposition of high tariffs, government legislation or very high taxes/import duties.
  2. A wide range of government subsidies on export industries to promote the country’s export- based policy.

3. Policies of nationalism.
   4. Accumulation of assets in gold and silver, and prohibition of private accumulation, use or export of these items.
4. One-way trade with colonies, and importation of gold and raw materials from these sources.

• ADAM SMITH coined the term “mercantile system” to

describe the system of political economy that sought to

enrich the country by restraining imports and encouraging

exports. This system dominated Western European economic

thought and policies, including Portugal, France, Spain, and

Great Britain from the sixteenth to the late eighteenth

centuries. Its use was favored by writers such as JeanBaptiste

Colbert, who at a time served as the French Finance Minister.

• The basic concept of mercantilism in terms of trading is to make sure that the

country’s own resources are exported to other countries in higher volumes or amounts

compared to the goods imported, which are kept to a minimum level. Trading is said

to be “balanced” if a country exports more than it imports. Through this system,

resources will increase and there will be a surplus on gold and silver reserves. • In the

words of the English mercantilist writer Thomas Mun, “The ordinary means therefore

to increase our wealth and treasure is by foreign trade, wherein we must ever observe

this rule” to sell more to strangers yearly than we consume of theirs in value”. • This

theory suggests that the government should play an active role in the economy by

encouraging exports and discouraging imports, especially through the use of tariffs.

• Assumpition: Three Assumptions of Mercantilism: 1) There is

a finite amount of wealth in the world. 2) A nation can only

grow rich at the expense of other nations. 3) Therefore, a

nation should try to achieve and maintain a favorable trade

balance, exporting more than it imports. The Use of Colonies

to Achieve a Favorable Trade Balance: 1) The economy of the

colonies is always secondary to the economy of the mother

country.

• The Austrian lawyer and scholar Philipp Wilhelm von Hornick, in his Austria Over All, If She Only Will of 1684, detailed a nine-point program of what he deemed effective national economy, which sums up the tenets of mercantilism comprehensively: • That every inch of a country's soil be utilized for agriculture, mining or manufacturing. • All raw materials found in a country should be used in domestic manufacture, since finished goods have a higher value than raw materials. • A large, working population should be encouraged. • All export of gold and silver should be prohibited and all domestic money be kept in circulation.

• That all imports of foreign goods should be discouraged as much as possible. • Where certain imports are indispensable they should be obtained at first hand, in exchange for other domestic goods instead of gold and silver. • As much as possible, imports should be confined to raw materials that can be finished [in the home country]. • Those opportunities should be constantly sought for selling a country's surplus manufactures to foreigners, so far as necessary, for gold and silver. • That no importation should be allowed if such goods are sufficiently and suitably supplied at home.

• Criticism: Adam Smith and David Hume were the founding fathers of antimercantilist thought; This practice was strongly attacked by Adam Smith in his 1776 work “The Wealth of Nations”. The criticisms of mercantilism are given elaborately- • Mercantilists viewed the economic system as a “zero-sum game”, in which a gain by one country results in a loss by other. Adam Smith & David Ricardo argued that, trade should be a positive-sum game, or a situation in which all countries can benefit. • Mercantilism unduly emphasized the importance of money and over-emphasized the importance of gold and silver. So Mercantilist ideas about wealth were nonsensical and untenable.

• The mercantilists unduly emphasized the importance of a favorable balance of trade. For the attainment of this objective they discouraged imports by imposing heavy and prohibitive duties on foreign goods and provided every possible ways to minimize exports. • The mercantilist assumption that the colonies existed for the benefit of the mother was not a sound economic proposition. • Mercantilism was a cause of frequent European wars in that time and motivated colonial expansion.
  • The mercantilist policies were designed to benefit the government and the commercial class, rather than the entire population.

The international product life cycle is a theoretical model describing how an industry evolves over time and across national borders. This theory also charts the development of a company’s marketing program when competing on both domestic and foreign fronts. International product life cycle concepts combine economic principles, such as market development and economies of scale, with product life cycle marketing and other standard business models .The four primary elements of the international product life cycle theory are: the structure of the demand for the product, manufacturing, international competition and marketing strategies, and the marketing strategy of the company that invented or innovated the product. These elements are categorized depending on the product’s stage in the traditional product life cycle. Introduction, growth, maturity, and decline are the stages of the basic product life cycle.

If the product is popular with consumers, then sales will start to rise. It may be a rapid growth or a slower one. Rapid growths that fall away just as quick are called 'Fads'. That process is known as Growth. It is typically characterized by a strong growth in sales and profits, and because the company can start to benefit from economies of scale in production, the profit margins, as well as the overall amount of profit, will increase. This makes it possible for businesses to invest more money in the promotional activity to maximize the potential of this growth stage.

During the maturity stage, the product is established and the aim for the manufacturer is now to maintain the market share they have built up. This is probably the most competitive time for most products and businesses need to invest wisely in any marketing they undertake. They also need to consider any product modifications or improvements to the production process which might give them a competitive advantage. At the very end of the Maturity stage, and where there is no further growth possible, saturation occurs. This is also referred to as Saturation Point. This is when little or no advertising is needed and sales are levelling off. This is the period of stability. during this period, the sales of the product reaches the peak. there is a steady demand for the product and no possibility for growth. However, at this stage other competitors also become popular and capture the market.