Balance Of Trade Mercantilism

Balance of Trade

According to mercantilistic thinking, a country should encourage exports and discourage imports by means of tariffs, quotas, subsidies, taxes, and the like, in order to achieve a so-called favorable balance of trade. Production should be stimulated by governmental interference in the domestic economy and by the regulation of foreign trade. Protective duties should be placed on manufactured goods from abroad; and the importation of cheap raw materials, to be used in manufacturing goods for export, should be encouraged.

Historians of economic thought disagree over the nature and significance of the balance of trade doctrine in mercantilist literature. It is clear, however, that many early mercantilists, who defined the wealth of a nation not in terms of the nation's production or consumption of goods but in terms of its holdings of precious metals, argued for a favorable balance of trade because it would lead to a flow of precious metals into the domestic economy to settle the trade balance.

The first mercantilists argued that a favorable balance of trade should be struck with each nation. A number of subsequent writers, however, argued that only the overall balance of trade with all nations was significant. Thus, England might have an unfavorable balance of trade with India, but because it could import from India cheap raw materials that could be used to manufacture goods in England for export, it might well have a favorable overall trade balance when all nations were taken into account.

A related issue concerned the export of precious metals or bullion. The early mercantilists recommended that the export of bullion be strictly prohibited. Later writers suggested that exporting bullion might lead to an improvement in overall trade balances if the bullion were used to purchase raw materials for export goods. The mercantilists' persistent advocacy of a favorable balance of trade raises some perplexing questions, which are best handled by examining the mercantilists' views about money.