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The Mercantilists
What is wealth?
The Mercantilist answer was the stock of precious metals possessed by a country.
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The Mercantilists
What is wealth? How can precious metals be obtained?
Extraction from naturally occurring stocks
This option is available to few countries
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The Mercantilists
What is wealth? How can precious metals be obtained?
Extraction from naturally occurring stocks Earn precious metals through exports of goods and services
Since payment for exports is made with precious metals, exporting causes precious metals to flow into a country Similarly, since payment for imports is also made with precious metals, importing causes precious metals to flow out of country
Dale R. DeBoer University of Colorado, Colorado Springs 2-7
The Mercantilists
What is wealth? How can precious metals be obtained? The natural conclusion exports must exceed imports for a country to become wealthy!
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The Mercantilists
What is wealth? How can precious metals be obtained? The natural conclusion exports must exceed imports for a country to become wealthy! Can this condition hold for all countries?
No! Therefore, the wealth of one country must come at the expense of another country.
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The Mercantilists
What is wealth? How can precious metals be obtained? The natural conclusion exports must exceed imports for a country to become wealthy! Can this condition hold for all countries? Mercantilist policy
Strict government control over economic activity to ensure a positive trade balance
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The Mercantilists
What is wealth? How can precious metals be obtained? The natural conclusion exports must exceed imports for a country to become wealthy! Can this condition hold for all countries? Mercantilist policy A further look at the Mercantilists
Federal Reserve Bank of San Franciscos Major Schools of Economic Theory
FRBSF WWW link
Dale R. DeBoer University of Colorado, Colorado Springs 2 - 11
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Absolute advantage
Built on the ideas of Adam Smith
The Library of Economic Liberty Biography of Adam Smith
WWW Link
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Absolute advantage
Built on the ideas of Adam Smith Absolute advantage exists between nations when they differ in their ability to produce goods.
More specifically, absolute advantage exists when one country is good at producing one item, while another country is good at producing another item.
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Goods
Coffee beans Wool
Mexico
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Mexico
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Mexico
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A fatal flaw?
Absolute advantage requires one country to be better at production of one product and another country to be better at production of another good for specialization and trade to be mutually advantageous. What if one country is better at everything?
The theory of comparative advantage provides this answer.
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Comparative advantage
Built on the ideas of David Ricardo
The New School History of Economic Thought Biography of David Ricardo
WWW Link
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Comparative advantage
Built on the ideas of David Ricardo The law of comparative advantage shows how mutually beneficial specialization and trade may be driven by relative advantages in production rather than absolute advantages in production.
Given the somewhat counter-intuitive nature of the law of comparative advantage its implications are best seen through example.
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Goods
Coffee beans Wool
Mexico
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Mexico
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Suppose the exchange 4 1 unit = 4 per unit rate between pesos and 4 x 10P/ = 10P pounds is 1 = 40P per unit This gives the unit costs indicated in the chart
Dale R. DeBoer University of Colorado, Colorado Springs
Suppose the exchange 4 4 units = 1 per unit rate between pesos and 1 x 10P/ = 10P pounds is 1 = 10P per unit This gives the unit costs indicated in the chart
Dale R. DeBoer University of Colorado, Colorado Springs
Suppose units = 10P per unit 100P 10 the exchange rate between pesos and pounds is 1 = 10P This gives the unit costs indicated in the chart
Dale R. DeBoer University of Colorado, Colorado Springs
Suppose the = 20P per unit 100P 5 units exchange rate between pesos and pounds is 1 = 10P This gives the unit costs indicated in the chart
Dale R. DeBoer University of Colorado, Colorado Springs
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80 60 40 20 0
30 0
80 60 40 20 0
30 0
80 60 40 20 0
30 0
Cloth
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Cloth
Wheat
UK
140 120 100 80 60 40 20 0 0 20 40 60 80 100 120 140 160 180 200
Cloth
Wheat
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Cloth
(90W, 60C)
Wheat
UK
140 120 100 80 60 40 20 0 0 20
Cloth
(40W, 40C)
40
60
Wheat
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US
140 120 100 80 60 40 20 0 0 20 40 60
Cloth
(90W, 60C)
Wheat
UK
140 120 100 80 60 40 20 0 0 20
Cloth
(40W, 40C)
40
60
Wheat
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Cloth
Wheat
Production
140 120 100 80 60 40 20 0 0 20 40 60
UK
Cloth
(70W, 50C)
Wheat
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