Economics Balance Of Trade Questions Medium
There are several main theories that explain the balance of trade. These theories include the mercantilist theory, the classical theory, and the modern theory.
1. Mercantilist Theory: This theory originated in the 16th to 18th centuries and emphasizes the accumulation of wealth through a positive balance of trade. According to mercantilists, a country should export more than it imports in order to accumulate gold and silver reserves. They believed that a positive balance of trade would lead to economic prosperity and national power.
2. Classical Theory: The classical economists, such as Adam Smith and David Ricardo, developed theories in the 18th and 19th centuries that challenged the mercantilist view. They argued that trade imbalances are temporary and self-correcting. According to the classical theory, countries should specialize in producing goods in which they have a comparative advantage and engage in free trade. This theory suggests that trade deficits or surpluses will naturally adjust through changes in prices and exchange rates.
3. Modern Theory: The modern theory of balance of trade focuses on factors such as income levels, savings and investment rates, and exchange rates. It takes into account the interdependence of economies and the role of capital flows. The modern theory suggests that trade imbalances can be influenced by factors such as domestic savings and investment rates, government policies, and exchange rate fluctuations. It recognizes that trade deficits or surpluses can have both positive and negative effects on an economy, depending on the specific circumstances.
Overall, these theories provide different perspectives on the balance of trade, with the mercantilist theory emphasizing the accumulation of wealth, the classical theory emphasizing comparative advantage and free trade, and the modern theory considering various economic factors and interdependencies.