merchantilism

Topics: Economics, Macroeconomics, Monetary policy Pages: 44 (6341 words) Published: January 11, 2014
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Mercantilism, Foreign Asset
Accumulation and Macroeconomic Policy
Gaowang Wang and Heng-fu Zou
Wuhan University, CEMA at Central University of Economics and Finance

30. October 2011

Online at http://mpra.ub.uni-muenchen.de/34519/
MPRA Paper No. 34519, posted 4. November 2011 18:15 UTC

Mercantilism, Foreign Asset Accumulation and Macroeconomic
Policy
Gaowang Wang
School of Economics and Management, IAS, Wuhan University, Wuhan, China Email: wanggaowang@gmail.com
Heng-fu Zou
CEMA, Central University
China School of Advanced Study (SAS), Shenzhen University, China IAS, Wuhan University, China
Guanghua School of Management, Peking University, China
Email: zouhengfu@gmail.com
November 4, 2011

Abstract

This paper develops a simple mercantilism model for a small open economy and examines the real e¤ects of macroeconomic policies. In this setting, the saddle-point stability of the model with wealth e¤ects hinges on an interesting "relative smoothness condition" for foreign asset accumulation. And comparative static analysis shows that an increase of monetary growth rate and a central-bank purchase of foreign exchange have positive real e¤ects on the economy. In contrast, an increase of government expenditure always has negative e¤ects on the economy. Moreover, the stronger of the mercantilist sentiments, the more consumption, real money balance holdings and foreign asset accumulation in the long run. These conclusions are very di¤erent from those ridiculous ones of Obstfeld’ paper (1981).

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Keywords: Mercantilism, Foreign Asset Accumulation, Relative Smoothness Condition.
JEL Classi…cation Numbers: E58, E63, F52, F41.

1

Introduction

Mercantilism is an economic theory that dominated Western European economic policies from the 16th to the late-18th century. Mercantilist ideas holds that the prosperity of a nation is dependent upon its supply of economic assets (or capital), which are represented by bullion (gold, silver and trade value) held by the state. And it tells that the global volume of international trade is "unchangeable" and a positive balance of trade with other nations (exports minus imports) is the only way to increase the wealth of a nation. At the same time, the theory has strong policy implications that the ruling government should advance these goals by playing a protectionist role in the economy by encouraging exports and discouraging imports, notably through the use of subsidies and tari¤s respectively. Therefore, it is very interesting and meanful to reexamine its historical developments and realistic implications and construct models to investigate its e¤ects mathematically.

Historically, a number of scholars like Hume, Dudley North, and John Locke found important ‡
aws with mercantilism. But Adam Smith and David Hume are considered to be the founding fathers of anti-mercantilist thought. Hume famously noted the impossibility of the mercantilist’ s
goal of a constant positive balance of trade.

1

But based on our point of view, it is highly

probable that Hume neglected an important process of inherent economic growth of the nations with Mercantilist ideas. It is obvious that accumulated assets (or money) can be transformed into all sorts of production factors, such as physical (and human) capital, raw material, vehicles and new technology, etc. That is to say, the nation with mercantilist ideas can expand production scale, invest in new technology and purchase more raw materials from other nations. Then, product scale will be enlarged and production cost will be decreased and product e¢ ciency will be improved. Thus, it must be better economic growth which embodies more income (or wealth) and consumption in the long run. Just like Reynolds (2000) lists major tenets of mercantilism: "

import raw material, export …nished good; low wages, large population, educated workers,

increased productivity, mobility of inputs...

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