Copyright (2018) 1stClassEcons
ECON0008 – ANSWER OUTLINE
BULLIONISM VS MUN
Bullionism : wealth identified with gold/precious metals. Quest for gold is a zero sum game :
amount of gold is fixed, increase in one nation’s wealth must come in expense of another nation.
Prevent money from being exported – keep gold in the kingdom.
Thomas Mun : Believes that wealth can be increased by foreign trade, in specific a Balance of
Trade surplus. Although BOT and BOP distinction not yet made by Mun, he includes good and all
aspects of merchants’ mark-up (“Merchant gains”) in his trade theory. Believes that export of money
can increase a nation’s treasure (conflict with bullionists). Argues that when gold is used in trade to
acquire goods that are subsequently re-exported, even more gold will be returned than was
originally sent out. Keeping gold in the kingdom does not multiply wealth, will raise prices and
diminish exports.
EQUATION OF EXCHANGE
Influx of gold into Europe due to the discovery of America in the 16th century has caused a
century-long inflationary process. Relationship between increase in money supply (precious metal)
and increase in prices have been noticed.
This led to early formulations of of QTM which states that price level changes proportionately with
money supply, shown by the equation of exchange MV=PT (explain each component)
Mercantilist argue that :
a) Lack of M is an obstacle to trade
b) Increase in M could quicken trade - inflationary pressure could be mitigated or even neutralized.
▪ This can be shown with the equation of exchange : MV = PT
▪ Argument depended on the assumption that velocity of circulation of money is constant.
Assume velocity constant, V = Ṽ, M Ṽ = PT
▪ Wealth of nation is identified with gold/precious metals. Influx of precious metal from
America, increase in money supply, M1 > M0.
i. Mitigated effects of inflationary pressure
Increase in M stimulated the levels of activities, quickens trade and leads to increase in
transactions : T1 > T0
If ⧍T → ⧍M, ⧍P ↓ (Mitigated the effects of inflationary pressure)
ii. Neutralized effects of inflationary pressure
𝑀1 𝑀0
If P and T increases proportionately, ⧍T = ⧍M, =
𝑇1 𝑇0
𝑀1 𝑀0
P1 = Ṽ𝑇1
= Ṽ𝑇0
= P0 (Neutralized effects of inflationary pressure)
, Copyright (2018) 1stClassEcons
MERCANTILIST TO CLASSICAL
Mercantilist : The wealth and power of a nation-state was evaluated base on the accumulation of
gold and silver. To achieve wealth and power - promote export and limit import in order to generate
trade surplus value. Focus on expansion of trade.
Transition to classical :
▪ The mercantilist concept that gold and silver are the wealth of a nation was rapidly becoming
outmoded during the transition period.
▪ Mercantilists viewed trade as being essentially like warfare (one-sum game); one nation gained
what the other lost. North asserted, on the contrary, that trade is mutually advantageous, for no
one will accept a smaller value in exchange for what is given up.
▪ Moreover, he asserted, it is not trade that most enriches the nation, but production.
SPATIAL COMPACTNESS
Petty’s views on the importance of spatial compactness was derived from his observations from
Holland’s success as the most technologically advanced and most densely populated country in
Europe.
According to Petty, spatial compactness provides favourable conditions for economies of scale,
technological progress and division of labour.
i) Economies of scale in
“The charge on administration of justice would be easier” (administrative costs)
Other ‘social overheads’
Time saved to travel to work
(Not EOS in production process)
ii) Technological progress
benefits of compactness is a prominent theme in Petty’s writings on ‘our metropolis London’
(London is the supreme example)
favourable condition for ‘propagation and improvement of useful learning’ : ideas and
innovation spreads rapidly, more people interact, produce more ideas, higher chance of
innovation
iii) Division of labour
Example : in the making of a watch, divided to many parts (wheel, spring, cases..], “the
watch will be better and cheaper than if the whole work be put upon one man”
Petty’s policy proposal to increase compactness :
i) Higher birth rate
“multiply the people”
Popular idea : wealth of nation lies in high population
ii) Inward migration from Ireland to England
“inward transfer of population” or ‘transplantation’ of the population of Ireland into England
to give England the kind of advantages of population density enjoyed by Holland.
ECON0008 – ANSWER OUTLINE
BULLIONISM VS MUN
Bullionism : wealth identified with gold/precious metals. Quest for gold is a zero sum game :
amount of gold is fixed, increase in one nation’s wealth must come in expense of another nation.
Prevent money from being exported – keep gold in the kingdom.
Thomas Mun : Believes that wealth can be increased by foreign trade, in specific a Balance of
Trade surplus. Although BOT and BOP distinction not yet made by Mun, he includes good and all
aspects of merchants’ mark-up (“Merchant gains”) in his trade theory. Believes that export of money
can increase a nation’s treasure (conflict with bullionists). Argues that when gold is used in trade to
acquire goods that are subsequently re-exported, even more gold will be returned than was
originally sent out. Keeping gold in the kingdom does not multiply wealth, will raise prices and
diminish exports.
EQUATION OF EXCHANGE
Influx of gold into Europe due to the discovery of America in the 16th century has caused a
century-long inflationary process. Relationship between increase in money supply (precious metal)
and increase in prices have been noticed.
This led to early formulations of of QTM which states that price level changes proportionately with
money supply, shown by the equation of exchange MV=PT (explain each component)
Mercantilist argue that :
a) Lack of M is an obstacle to trade
b) Increase in M could quicken trade - inflationary pressure could be mitigated or even neutralized.
▪ This can be shown with the equation of exchange : MV = PT
▪ Argument depended on the assumption that velocity of circulation of money is constant.
Assume velocity constant, V = Ṽ, M Ṽ = PT
▪ Wealth of nation is identified with gold/precious metals. Influx of precious metal from
America, increase in money supply, M1 > M0.
i. Mitigated effects of inflationary pressure
Increase in M stimulated the levels of activities, quickens trade and leads to increase in
transactions : T1 > T0
If ⧍T → ⧍M, ⧍P ↓ (Mitigated the effects of inflationary pressure)
ii. Neutralized effects of inflationary pressure
𝑀1 𝑀0
If P and T increases proportionately, ⧍T = ⧍M, =
𝑇1 𝑇0
𝑀1 𝑀0
P1 = Ṽ𝑇1
= Ṽ𝑇0
= P0 (Neutralized effects of inflationary pressure)
, Copyright (2018) 1stClassEcons
MERCANTILIST TO CLASSICAL
Mercantilist : The wealth and power of a nation-state was evaluated base on the accumulation of
gold and silver. To achieve wealth and power - promote export and limit import in order to generate
trade surplus value. Focus on expansion of trade.
Transition to classical :
▪ The mercantilist concept that gold and silver are the wealth of a nation was rapidly becoming
outmoded during the transition period.
▪ Mercantilists viewed trade as being essentially like warfare (one-sum game); one nation gained
what the other lost. North asserted, on the contrary, that trade is mutually advantageous, for no
one will accept a smaller value in exchange for what is given up.
▪ Moreover, he asserted, it is not trade that most enriches the nation, but production.
SPATIAL COMPACTNESS
Petty’s views on the importance of spatial compactness was derived from his observations from
Holland’s success as the most technologically advanced and most densely populated country in
Europe.
According to Petty, spatial compactness provides favourable conditions for economies of scale,
technological progress and division of labour.
i) Economies of scale in
“The charge on administration of justice would be easier” (administrative costs)
Other ‘social overheads’
Time saved to travel to work
(Not EOS in production process)
ii) Technological progress
benefits of compactness is a prominent theme in Petty’s writings on ‘our metropolis London’
(London is the supreme example)
favourable condition for ‘propagation and improvement of useful learning’ : ideas and
innovation spreads rapidly, more people interact, produce more ideas, higher chance of
innovation
iii) Division of labour
Example : in the making of a watch, divided to many parts (wheel, spring, cases..], “the
watch will be better and cheaper than if the whole work be put upon one man”
Petty’s policy proposal to increase compactness :
i) Higher birth rate
“multiply the people”
Popular idea : wealth of nation lies in high population
ii) Inward migration from Ireland to England
“inward transfer of population” or ‘transplantation’ of the population of Ireland into England
to give England the kind of advantages of population density enjoyed by Holland.
