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Chapter 6:mercantilism vs absolute advantage vs comparative advantage -…
Chapter 6:mercantilism vs absolute advantage vs comparative advantage
Mercantilism
Used in the 16th century
A country's wealth is measured by gold and silver
The goal for this strategy?
To promote exports & decrease imports to increase the country's holding of gold
The losers?
Consumers within that period
Taxed by the government to pay for government subsidies on exports
Consumer paid higher prices for goods.
Protectionists & neomercantilists
Absolute advantage
Adam Smith
Argued that Mercantilism weakened economies
Robs people's ability to trade freely and benefit from voluntary exchanges
Countries using this theory squander its resources on producing goods they are inefficient at
The theory says that you produce what you are efficient at and import what you're in efficient at
Comparative advantage
David Ricardo
Believed that Adam Smiths theory was flawed
What if 2 countries were efficient at producing both goods that they import and export?
Countries should produce & export what they are relatively more productive at producing than the trading country (they have lower opportunity cost)
& import what they are inefficient at producing
Opportunity cost
The value of what is given up to create the good
A lower opportunity cost = the country being efficient in creating that product