Mercantilism and Absolute Advantage

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Questions and Answers

What was the main assertion of mercantilism regarding national wealth?

Importing goods is vital for increasing wealth.

Trade should be conducted with minimal government intervention.

Gold and silver are the mainstays of national wealth. (correct)

National wealth is based on the volume of trade.

What is considered a flaw in the mercantilist perspective on trade?

Trade is viewed as a zero-sum game. (correct)

It promotes free trade and open markets.

Trade is viewed as a positive-sum game.

It advocates for unrestricted imports.

Which of the following policies did mercantilism recommend to achieve a trade surplus?

Subsidizing imports to reduce costs.

Limiting imports through tariffs and quotas. (correct)

Taxing exports to limit sales abroad.

Subsidizing imports to reduce costs.

How did Thomas Mun regard foreign trade in relation to national wealth?

Maximizing export value is crucial. Signup and view all the answers

What modern example of neo-mercantilism is mentioned in the content?

China's strategies to sustain trade surpluses. Signup and view all the answers

What did mercantilism illustrate about government intervention in trade?

It is essential to achieve a trade surplus. Signup and view all the answers

Which thinkers were critical in demonstrating the limitations of mercantilism?

Adam Smith and David Ricardo. Signup and view all the answers

What is the relationship between political power and economic power as proposed by neo-mercantilists?

Economic power is equated with a balance-of-trade surplus. Signup and view all the answers

What does absolute advantage suggest countries should do?

Specialize in goods they can produce more efficiently and trade. Signup and view all the answers

In the example given, what does Ghana have an absolute advantage in producing?

Cocoa Signup and view all the answers

How many tons of cocoa can Ghana produce with its resources?

20 tons Signup and view all the answers

What is the production possibility frontier (PPF)?

A graph showing the maximum output possibilities for two goods given resources. Signup and view all the answers

In the provided example, how many resources does South Korea use to produce one ton of rice?

10 resources Signup and view all the answers

What is one of the main benefits of specializing in absolute advantage?

It allows for more efficient allocation of resources. Signup and view all the answers

Considering the resources available, what is the maximum production capability of South Korea for cocoa?

5 tons Signup and view all the answers

Which scenario illustrates the concept of absolute advantage?

One country produces textiles while another produces wine for trade. Signup and view all the answers

What does Porter identify as the primary element of a nation's competitive advantage?

Factor endowments Signup and view all the answers

Which of the following correctly describes demand conditions in Porter's Diamond framework?

The nature of home demand for the industry's products or services Signup and view all the answers

How do related and supporting industries impact a nation's competitive landscape?

They provide support to businesses through supply chains Signup and view all the answers

Which aspect of a nation's structure does Porter suggest influences firm strategy and rivalry?

The conditions governing how companies are created and managed Signup and view all the answers

What role do chance events play in Porter's Diamond model?

They can reshape industry structures and competitive dynamics Signup and view all the answers

In what way can government influence the national diamond according to Porter?

Through regulation that alters demand conditions Signup and view all the answers

Which component of the diamond model describes the competitive interplay among local firms?

Firm strategy, structure, and rivalry Signup and view all the answers

Which of the following correctly illustrates the concept of factor endowments in international competition?

The availability of skilled labor and infrastructure Signup and view all the answers

What is the significance of related and supporting industries in achieving national competitive advantage?

They help in achieving a strong competitive position internationally. Signup and view all the answers

Which country has been identified for its strength in fabricated steel products?

Sweden Signup and view all the answers

How does technological leadership in an industry benefit related industries?

It provides foundational knowledge and innovations. Signup and view all the answers

What is a cluster of related industries, as described in Porter’s study?

A geographical concentration of interdependent industries. Signup and view all the answers

Which of the following factors does NOT characterize a strong national competitive advantage according to Porter?

High levels of government intervention. Signup and view all the answers

What effect do geographic clusters have on knowledge flow?

They enhance collaboration and sharing of ideas. Signup and view all the answers

Which management characteristic is notably found in German and Japanese firms according to Porter?

A predominance of engineers in top management. Signup and view all the answers

What is a potential outcome of successful industries clustering together?

Increased flow of knowledge and innovations. Signup and view all the answers

What did Porter identify as a consequence of U.S. firms' management backgrounds?

A relative loss of competitiveness in engineering-based industries Signup and view all the answers

According to Porter, how does vigorous domestic rivalry affect competitive advantage?

It creates pressure to innovate and improve efficiency Signup and view all the answers

What does the capital account in the balance of payments primarily include?

Transactions in financial instruments Signup and view all the answers

Which of the following best describes the current account within the balance of payments?

Encompasses goods, services, investment income, and current transfers Signup and view all the answers

What distinctive trait characterizes Japanese companies in terms of domestic rivalry?

They experience significant fluctuations in market shares Signup and view all the answers

In the context of U.S. firms, what negative impact does an emphasis on finance have according to Porter?

Overemphasis on short-term financial returns Signup and view all the answers

What is suggested about the nature of competition in industries with vigorous domestic rivalry?

There is a significant drive for innovation and process improvement Signup and view all the answers

Which aspect is NOT included in the current account of the balance of payments?

Central bank reserves Signup and view all the answers

Study Notes

Mercantilism

Mercantilists believed that gold and silver were the primary drivers of national wealth.
Mercantilism advocated for a trade surplus, where a country exports more than it imports, to accumulate gold and silver.
This doctrine emphasized government intervention to protect domestic industries and achieve a trade surplus through tariffs and quotas.
Mercantilist policies aimed to maximize exports and minimize imports.
Mercantilism viewed trade as a zero-sum game, where one country's gain came at the expense of another.

Absolute Advantage

Adam Smith proposed the theory of absolute advantage, suggesting countries should specialize in producing goods they can produce more efficiently and then trade for other goods.
Smith argued that countries should not produce goods they could obtain at a lower cost from other countries.
By specializing in areas of absolute advantage, countries could increase their overall output and benefit from trade.
The example of Ghana and South Korea illustrates how both countries can gain by focusing on producing the good they are better at (Ghana in cocoa and South Korea in rice).

Porter's Diamond

Michael Porter's Diamond Model identifies four attributes contributing to a nation's competitive advantage in specific industries.
Factors of Production: A nation's resources such as skilled labor, infrastructure, or natural resources.
Demand Conditions: The size and sophistication of domestic demand for a product or service.
Related and Supporting Industries: The presence of competitive supplier industries and related industries that can create synergies and knowledge transfer.
Firm Strategy, Structure, and Rivalry: The nature of domestic competition, management styles, and corporate governance.

Heckscher-Ohlin Theory

This theory builds upon the idea of factor endowments, suggesting countries specialize in goods that utilize their abundant factors of production.

Other Important Points

Government plays a role in shaping the national diamond by influencing factor endowments, demand conditions, and the intensity of rivalry.
Chance events such as innovations can also significantly impact a nation's competitive advantage.
Clusters of related industries can lead to knowledge sharing and innovation due to proximity and interaction between firms.
Vigorous domestic rivalry is critical for pushing firms to improve efficiency, quality, and innovation, thereby fostering international competitiveness.

Balance of Payments Accounts

The balance of payments categorizes international transactions into two primary accounts: the current account and the capital account.
The current account tracks transactions in goods, services, investment income, and current transfers.
The capital account (or financial account) captures transactions in financial instruments and central bank reserves.
The current account is incorporated into national income calculations, while the capital account is not.

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Description

Explore the principles of mercantilism and the theory of absolute advantage in this quiz. Understand how these economic theories influenced trade policies, government intervention, and the wealth of nations. Test your knowledge on the key concepts proposed by Adam Smith and mercantilist thinkers.