You might have noticed that many goods and services are imported by us because they are simply not produced in our country for various reasons and therefore not available domestically. However, we do import many things which can be produced or are being produced within our country. Why do we do so? Is it beneficial to engage in international trade? The theories of international trade which we discuss in the following sections provide answers to these and other related questions.
The Mercantilists’ View of International Trade
Mercantilism, which was the policy of Europe’s great powers, was based on the premise that national wealth and power are best served by increasing exports and collecting precious metals in return. Mercantilists also believed that the more gold and silver a country accumulates, the richer it becomes. Mercantilism advocated maximizing exports in order to bring in more “specie” (precious metals) and minimizing imports through the state imposing very high tariffs on foreign goods. This view argues that trade is a ‘zero-sum game’, with winners who win does so only at the expense of losers and one country’s gain is equal to another country’s loss, so that the net change in wealth or benefits among the participants is zero. The arguments put forth by mercantilists were later proved to have many shortcomings by later economists. Although it is still very important theory which explains policies followed by many big and fast growing economies in Asia.
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