1. Explain the mercantilist view on trade.

Should Vietnam follow mercantilist

view on trade?
The mercantilist view on trade
-Mercantilism was an economic theory and policy framework that dominated
European economic thought from the 16th to the 18th centuries. According
to mercantilists, the wealth and power of a nation were believed to be
determined by the amount of precious metals, particularly gold and silver, it
possessed.The key principles of mercantilism revolved around the promotion
of a positive balance of trade, protectionism, and the accumulation of wealth
through trade.

Should Vietnam follow mercantilist view on trade

Positive
- Mercantilism emphasizes the development of domestic industries and
manufacturing capabilities, this can promote industrialization and economic
growth by nurturing local production and reducing dependence on
imports.By protecting domestic industries, these countries can create
employment opportunities,increase output, and generate higher tax revenues
-Trade Surpluses and Foreign Exchange Reserves: Mercantilism promotes
export-oriented policies, aiming to achieve trade surplusesby selling more
goods abroad than importing. This can benefit developing countries by
increasing their foreign exchange reserves, which are crucial for stabilizing
currencies,repaying external debts, and funding necessary imports like
technology and machinery
-Technology Transfer and Innovation: Developing countries pursuing
mercantilist policies may seek advanced technologies from developed
nations. This process can facilitate technology transfer,enabling
developing countries to acquire technological expertise and enhance their
productive capacities

Negative:
Limited focus on exports: Mercantilism places a strong emphasis on
exporting goods and accumulating wealth through trade surpluses.
This often means that developing countries areencouraged to
specialize in producing and exporting raw materials or low-value-added
goods.
 As a result, they may face challenges in diversifying their economies and
moving up the value chain.
Protectionist policies: Mercantilist policies frequently involve
protectionist measures such as tariffs,import quotas, and subsidies
aimed at stimulating domestic industries while limiting competition
from foreign producers. However, for developing countries like Vietnam,
these policies can hinder access to international markets and impede
their ability to compete globally.

Trade imbalances and dependency:Developing countries relying heavily on exports

may become overly dependent onexternal demand and vulnerable to fluctuations in
global markets. Moreover, the pursuit of mercantilist policies by developed
countries can place additional burdens on developing nations, exacerbating
existing economic inequalities.Mercantilism's emphasis on trade surpluses can lead
to persistent trade imbalancesbetween countries

2. What was the basis for and the pattern of trade according to Adam Smith’s theory
of absolute advantage? Give an example of absolute advantage. What policies did
Smith advocate in international trade? What are limitations of this theory?

The Basic for Trade

The basis for trade lies in the differences in productivity or efficiency
betweencountries. Smith argued that countries should specialize in producing
goods and servicesin which they have an absolute advantage, meaning they can
produce more efficiently orwith fewer resources than other nations.

The Pattern of Trade:

When one country has an absolute advantage in production of a commodity, but
anabsolute disadvantage with respect to the other nation in a second
commodity, both nations can gain by specializing in their absolute advantage and
exchanging part of the output for the commodity of its absolute disadvantage

Contributions and limitations of Adam Smith’s theory of absolute advantage

Contributions:Overcoming the limitations of mercantilism, the theory of absolute

advantage wason track when it outlined the scientific basis for creating value as
production rather thancirculation. According to the theory of absolute advantage,
trade benefits both countries
The simplicity of the theory of absolute advantage is a major pro of
absoluteadvantage. The idea offers a sophisticated justification for trade
advantages,demonstrating how nations can profit by concentrating on their
assets.Besides, this theory mentioned specialization for the first time and showed
the benefits of specialization. Free trade would cause world resources to be utilized
most efficiently, maximizing the world welfare

Limitations: The theory of absolute advantage can explain only a small fraction of
world tradetoday, such as trade between developed countries and developing
countries. Meanwhile,most world trade today, especially trade between
developed countries, cannot be explained by absolute advantage.First, this theory
assumes only two products and two countries. So, internationaltrade involves
only bilateral exchanges. This assumption is unrealistic because
international trade in today’s modern economy involves many countries and
products.
Second, the production input is not only labor. In fact, other factors, such as
capitaland natural resources, can also affect unit costs. So is technology. For
example, capitalsuch as more technologically advanced machines allow us to
produce output at a lowercost
Third, there are transportation costs in international trade. And those costs
maycontribute to eliminating the advantage effect. For example, the
selling price willeventually be higher due to high transportation costs – caused
by poor infrastructure –even though a country can produce at low unit costs.

3. Assume that both Vietnam and China produce tables and clothes with the
following costs.
Vietnam China
Unit cost of table (T) 2 8
Unit cost of cloth (C) 1 2

a. What is the opportunity cost of table (T) in each country?

-In Vietnam, the opportunity cost of one unit of producing table is 2 clothes
-In China, the opportunity cost of one table production unit is 4 clothes.
b. In which commodity does Vietnam have a comparative cost advantage?
What about China?
-Vietnam has a comparative cost advantage in producing tables, China has a
comparative advantage in cloths.