CHAPTER 2
EARLY TRADE THEORIES:
MERCANTILISM AND THE TRANSITION TO THE CLASSICAL
WORLD OF DAVID RICARDO
A. Essay Questions
1. Explain how the price-specie-flow mechanism operates to maintain balanced trade between
countries. What are the assumptions that are critical to the mechanism’s successful operation?
2. Why was a positive trade balance so important to Mercantilists? In Mercantilist thinking, why
did a positive trade balance not result in domestic inflation and a loss of international competitiveness?
3. What were the critical foundations of Mercantilist thought? What trade policies resulted from
this way of thinking?
4. Explain what is meant by a zero-sum game, and why it was central to Mercantilist thinking.
Then, explain how Smith’s idea of absolute advantage altered the nature of the “game.”
5. (a) Why did the Mercantilists think that a situation where a country’s exports exceed its
imports is a “favorable” situation for the country? Briefly, what policies would a
Mercantilist recommend in order to generate such a “favorable” situation?
(b) What was the “price-specie-flow doctrine” and how did it undermine Mercantilist
thinking? Why would a situation where the demands for traded goods are “inelastic”
with respect to price changes pose a problem for the “price-specie-flow doctrine” in its
attack on Mercantilist thinking?
,B. Multiple-Choice Questions
6. In the price-specie-flow doctrine, a deficit country will __________ gold, and this gold
flow will ultimately lead to __________ in the deficit country’s exports.
a. lose; a decrease
* b. lose; an increase
c. gain; a decrease
d. gain; an increase
7. In the Mercantilist view of international trade (in a two-country world),
a. both countries could gain from trade at the same time, but the distribution of the gains
depended upon the terms of trade.
b. both countries could gain from trade at the same time, and the terms of trade were of
no consequence for the distribution of the gains.
c. neither country could ever gain from trade.
* d. one country’s gain from trade was associated with a loss for the other country.
8. According to the labor theory of value,
a. the value of labor is determined by its value in production.
b. the value of a good is determined by the amount of labor with which each unit of
capital in an industry works.
, * c. the price of a good A compared to the price of good B bears the same relationship as
the relative amounts of labor used in producing each good.
d. the values of two minerals such as coal and gold with similar production costs may be
very different.
9. If the demand for traded goods is price-inelastic, the price-specie-flow mechanism will
result in
a. gold movements between countries that remove trade deficits and surpluses.
* b. gold movements between countries that worsen trade deficits and surpluses.
c. negligible movements of gold between countries and hence little or no adjustment of
trade deficits and surpluses.
d. a removal of the basis for trade between countries.
10. In Adam Smith’s view, international trade
a. benefited both trading countries.
b. was based on absolute cost differences.
c. reflected the resource base of the countries in question.
* d. all of the above.
11. Which of the following policies would NOT be consistent with the Mercantilist balance-
of-trade doctrine?
* a. payment of high wages to labor
b. import duties on final products
c. export subsidies
, d. prohibition of imports of manufactured goods
EARLY TRADE THEORIES:
MERCANTILISM AND THE TRANSITION TO THE CLASSICAL
WORLD OF DAVID RICARDO
A. Essay Questions
1. Explain how the price-specie-flow mechanism operates to maintain balanced trade between
countries. What are the assumptions that are critical to the mechanism’s successful operation?
2. Why was a positive trade balance so important to Mercantilists? In Mercantilist thinking, why
did a positive trade balance not result in domestic inflation and a loss of international competitiveness?
3. What were the critical foundations of Mercantilist thought? What trade policies resulted from
this way of thinking?
4. Explain what is meant by a zero-sum game, and why it was central to Mercantilist thinking.
Then, explain how Smith’s idea of absolute advantage altered the nature of the “game.”
5. (a) Why did the Mercantilists think that a situation where a country’s exports exceed its
imports is a “favorable” situation for the country? Briefly, what policies would a
Mercantilist recommend in order to generate such a “favorable” situation?
(b) What was the “price-specie-flow doctrine” and how did it undermine Mercantilist
thinking? Why would a situation where the demands for traded goods are “inelastic”
with respect to price changes pose a problem for the “price-specie-flow doctrine” in its
attack on Mercantilist thinking?
,B. Multiple-Choice Questions
6. In the price-specie-flow doctrine, a deficit country will __________ gold, and this gold
flow will ultimately lead to __________ in the deficit country’s exports.
a. lose; a decrease
* b. lose; an increase
c. gain; a decrease
d. gain; an increase
7. In the Mercantilist view of international trade (in a two-country world),
a. both countries could gain from trade at the same time, but the distribution of the gains
depended upon the terms of trade.
b. both countries could gain from trade at the same time, and the terms of trade were of
no consequence for the distribution of the gains.
c. neither country could ever gain from trade.
* d. one country’s gain from trade was associated with a loss for the other country.
8. According to the labor theory of value,
a. the value of labor is determined by its value in production.
b. the value of a good is determined by the amount of labor with which each unit of
capital in an industry works.
, * c. the price of a good A compared to the price of good B bears the same relationship as
the relative amounts of labor used in producing each good.
d. the values of two minerals such as coal and gold with similar production costs may be
very different.
9. If the demand for traded goods is price-inelastic, the price-specie-flow mechanism will
result in
a. gold movements between countries that remove trade deficits and surpluses.
* b. gold movements between countries that worsen trade deficits and surpluses.
c. negligible movements of gold between countries and hence little or no adjustment of
trade deficits and surpluses.
d. a removal of the basis for trade between countries.
10. In Adam Smith’s view, international trade
a. benefited both trading countries.
b. was based on absolute cost differences.
c. reflected the resource base of the countries in question.
* d. all of the above.
11. Which of the following policies would NOT be consistent with the Mercantilist balance-
of-trade doctrine?
* a. payment of high wages to labor
b. import duties on final products
c. export subsidies
, d. prohibition of imports of manufactured goods
