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Mercantilism

Mercantilism (16th, 17th, and 18th century) Adam Smith

  • philosophy from about 300 years ago. The base of this theory was the “commercial revolution” or a transition from local economies to national economies, from feudalism to capitalism, from a rudimentary trade to a larger international trade.

  • Geographical discoveries not only stimulated the international trade, but also produced an affluent flow of gold and silver, which could be used to encourage the economy based on money and prices.

  • The theory states that the world only contained a fixed amount of wealth and that to increase a country wealth; one country had to take some wealth from another, either through having a higher import/export ratio

  • The theory was criticized by the newly appeared class. More money was associated with less products and inflation. The standard of living is weaker.

Mercantilist ideas did not decline until the coming of the Industrial Revolution & laissez-faire

International trade

3 Main Theories

Mercantilism

Absolute Advantage

Comparative Advantage

Overview of Classical Economics

Originated in the 18th and 19th centuries

Focuses on the tendency of markets to move towards equilibrium

Objective theories of value

Dynamics of economic growth

Allows individuals to act to own self-interest

Economic resources are allocated according to individual wants and needs

If households increased spending

then aggerate demand would increase causing a higher price level

smith believed that workers would demand a raise which would increase production cost,

causing the economy to be working at full equalibrium

Inflation

Government Intervention

Inflation occurs when prices rises and demand of g/s rises

David Hume and Adam Smith both introduced two theories

Classical Economics has an Origin?

Quality theory of inflation for production and a Quantity theory of inflation for money

This means that more money equals more inflation and that an increase in money supply does not necessarily mean an increase in economic output

  • Classical economics stressed and focuses on an equal economy and an emphasized importance of laissez-faire government intervention.

  • Free Market

  • The primary implications of this theory are that markets automatically achieve equilibrium and in so doing maintain full employment of resources without the need for government intervention.

The Triangle Theorem:

  • Demand-Pull Inflation- this is caused due to the increase in demand.
  • Cost-Push- this is caused due to the increase in supply and the decrease in production
  • Built-In Inflation-this is caused due to the conflict between the workers who WANT higher wages and the owners who PASS on this burden to the consumers to give their expenditure

Contained notions of:

  • unrestricted markets,
  • Laissez faire government( limited/no intervention)
  • emphasis on people acting in their own individual interests.
  • based on individual self regulations
  • full employment can be achieved without intervention by government
  • stresses individual freedoms, reliance on market exchanges, limits on government activity, and support of business activity

Adam Smith and his book the Wealth of Nations that was published in 1776

Adam Smith’s theory :

Exports are profitable if you can import goods that could satisfy better the necessities of consumers instead of producing them on the internal market.

The essence of Adam Smith theory is that the rule that leads the exchanges from any market, internal or external, is to determine the value of goods by measuring the labor incorporated in them.

Adam Smith’s theory on “Invisible hand”

Described unintended social benefits resulting from individual actions

He thought that if a nation is revolved around free markets and limited taxes then it will maximize their wealth

4 types of taxes:

taxes on rent for land

wages for labor

profit of capital

and taxes that would fail indifferently of these three factors- poll or taxes on consumption.

He thought that taxes on “necessary” items were ridiculous, but there should be taxes on “luxury” items

When a neighbor country can produce a good more efficiently within the same amount of time

Absolute Advantage

Effects of taxes

Comparative Advantage

Nations should specialize in producing the good in which they have the lowest opportunity cost

Ricardo’s principle of comparative advantage :

Every nation should specialize in the production of those commodities it can produce most efficiently and everything else should be imported.

If all nations were to take full advantage of the territorial division of labor, total world output would invariably be larger than it would be if nations tried to be self-sufficient.

Became the cornerstone of 19th-century international-trade theory.

Citations

Vitez, Osmond. "Differences Between Classical & Keynesian Economics." Small Business. Demandmedia. Web. 1 Apr. 2015. <http://smallbusiness.chron.com/differences-between-classical-keynesian-economics-3897.html>.

"Fours Schools of Economic Thought - Boundless Open Textbook." Boundless. Web. 1 Apr. 2015.

"Classical Economics." Encyclopedia Britannica Online. Encyclopedia Britannica. Web. 1 Apr. 2015.

"Economics of Inflation." Economics of Inflation. Web. 1 Apr. 2015.

"Adam Smith on Taxes." Adam Smith on Taxes. Web. 1 Apr. 2015.

Classical Economics

Afuah O. , Vivian L. and Vivian H.

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