Mercantilism

The first form of international trade theory was the concept of Mercantilism. This theory began around 1500 AD and lasted through the colonial era. The theory behind Mercantilism was that measurement of a country’s wealth was based on the amount of gold it was holding. Therefore, it was important to export more than the country imported in order to gain gold from other countries. This gold was then used to fund armies and solidify a central government. Under this theory, countries would restrict their imports and heavily subsidize domestic industries in order to increase exports.

Mercantilism also encouraged countries to use their colonies in order to support their trade objectives. The colonies would supply raw materials and low value goods to the colonizing country. Colonies were also forced to import the high value goods from the mother country. Mercantilism weakened around 1800 AD as other trade theories were established and governments stopped limiting the development of industry within their colonies. Today, the term Neomercantilism is used to indicate that a country is trying to run a favorable trade balance in order to achieve some political objective.

Written by Carl Phelps, Research Associate for GLOBAL ID LLC.
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Trade Pattern Theories

There are two main factors that determine a country’s tendency to trade internationally. The first is the proportion of its production that is comprised of nontradeable goods, or products and services that aren’t practical to export. The other factor is the country size, which can mean land area or the size of the economy. A country with a larger land area has a tendency to trade a lower proportion of its production because it will have a larger variety of natural resources. Countries with large economies trade more because they have greater production and higher incomes.

The factor-proportions theory explains what types of products a country has a tendency to trade. This theory looks at the basic factors of production of labor, land, and capital. If a country has a high endowment of a particular factor, then this factor will tend to be cheaper than the other factors. This helps to determine what types of products are produced, and thus traded.

Written by Carl Phelps, Research Associate for GLOBAL ID, LLC.