successful was this related work in explaining the paradox? Section B. Answer an
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successful was this related work in explaining the paradox? Section B. Answer any TWO questions in this section. (Each question carries 26 points.) If you answer all questions, only the first two answered will be graded BI·The U. S. government has recently criticized some countries for having big trade surpluses with the U. S. This argument was described by some people as a modern- day form of mercantilism. (a) Explain the original mercantilist argument: what trade policies did the mercantilists suggest to the governments? Why did they make such suggestion? Explain, using their approach, why international trade can be regarded as a zero- sum game. (b) Explain why the mercantilism may lead to no trade in the worlod. (c) Explain how the recent criticism by the U. S. government on some countries for having big trade surpluses against the U. S. is related but not the same as the original Mercantilist argument. Explain the similarities and differences between these two views. (d) Adam Smith suggested a different approach to assessing the impacts of foreign trade on a local economy. Explain why his view is revolutionary and how it turns the mercantilist approach upside down. Explain why Smith's approach suggests that foreign trade is a win-win practice for both countries. B2. Consider a monopolist in a closed economy, producing a homogeneous product with a marginal cost given by MC = 20 + 2q , where q is the output. The market demand is given by p=230-2q, where p is the market price.Explanation / Answer
a) Mercantilism can be referred to the trade practice at the beginning of 16th century to 18th century. As per the mercantilism theory the nation should export goods and earn bullion but it should not import anything as imports weaken the nation. So, at the time of mercantilism, the nations used to have very high tariffs to stop the import of goods but no tariffs on export.
According to this theory, international trade was a zero-sum game because if the nation was importing it was loosing or getting weaker and the other nation was gaining strength by exporting. There can be two winners in this game i.e. both the nations in the trade cannot gain.
b) Mercantilism promoted exports and only exports. To maintain exports to other nations the developed countries at that time tried maintaining colonies from there they use to get raw material and export finished goods. As per mercantilism theory, the nation importing is the weaker nation because the bullion (gold and silver) are leaving the country. What this theory didn't take into account was that one nation's import was other nations export if there is no import there will be no exports and no international trade.
c) As per the mercantilism view, the nations were exporting all the goods but nowadays the nation having a surplus with the US are exporting good to the US but they haven't placed any restriction on the US to export its own goods to the other nations. Provided the goods produced in the US should be competitive enough to penetrate the foreign market. In Mercantilism the nations use to raise high tariffs and other barriers to import.
d) Adam Smith suggested the approach of absolute advantage. As per his theory, the nation has an advantage in the production of some goods will export those goods and import other and both the nations can benefit from trade. IT turned Mercantilism upside down because it promoted both imports and exports and opened the international market for efficient production of goods and benefited the consumers.
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