Podcast
Questions and Answers
Which theory argues that a nation's power depends mainly on its wealth?
Which theory argues that a nation's power depends mainly on its wealth?
The Mercantilism theory suggests that a nation should aim for a trade surplus.
The Mercantilism theory suggests that a nation should aim for a trade surplus.
True
What currency does Mercantilism theory prioritize for trade?
What currency does Mercantilism theory prioritize for trade?
Gold and Silver
What assumption does Mercantilism make about wealth?
What assumption does Mercantilism make about wealth?
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What happens in a situation where a country has an absolute advantage in producing all goods?
What happens in a situation where a country has an absolute advantage in producing all goods?
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Who is associated with the Comparative Advantage theory?
Who is associated with the Comparative Advantage theory?
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A country can gain from trade even if it is less efficient at producing all goods compared to another country.
A country can gain from trade even if it is less efficient at producing all goods compared to another country.
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According to the Absolute Advantage theory, a country that can produce all goods more efficiently should engage in ____.
According to the Absolute Advantage theory, a country that can produce all goods more efficiently should engage in ____.
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Match the following trade theories with their main concept:
Match the following trade theories with their main concept:
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Study Notes
Mercantilism Theory
- A country's power depends on wealth to build strong navies, purchase vital trade goods, and increase national wealth.
- Governments should manage exports.
- Countries should maximize exports and minimize imports.
- Gold and silver are the main currency for trade.
- A favorable trade balance should be maintained, meaning more exports than imports.
Assumptions
- There is a finite amount of wealth in the world and one nation can only get rich at the expense of another.
Limitations
- A nation holding gold will lose its price advantage in the modern economy.
- It is expensive to enforce.
- Overlooks other sources of wealth, like capital and skilled labor.
- Economic regulation leads to illegal activities or smuggling.
Absolute Advantage theory
- Countries should specialize in the production of goods where they have an absolute advantage.
- This will lead to efficient production of goods and the potential for economic well-being for the people.
- Free trade is beneficial because both countries gain from engaging in exchange.
Limitations
- It does not explain how free trade can be advantageous to two countries if one country can produce all goods more efficiently.
- A country without an absolute advantage cannot gain from free trade.
- Differences in climatic conditions and natural resources do not lead to absolute advantage.
- What if a country is bad at making everything?
Comparative Advantage Theory
- A country should produce goods where it is most efficient and import goods where it is less efficient.
- Even if a country is efficient in producing all goods, trade between two countries is beneficial.
- A country will gain from activities where it can produce at world prices even though it may not be the most efficient producer.
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Description
Explore the fundamental concepts of Mercantilism and Absolute Advantage Theory in this quiz. Understand how these theories influence a nation's wealth, trade practices, and economic policies. Test your knowledge on their assumptions, limitations, and practical applications.
