Mercantilism Explained

Ashly Chole Senior Finance Researcher

Last Updated 24 April 2024

Throughout the 15th and 16th centuries, numerous nations employed the political economy system known as mercantilism. In contrast to imports, it promoted the export of gold and silver. Using domestic resources to increase riches and power was its main objective. This made it difficult for countries to trade with one another because they would not want their own commodities to be transferred away from them and because they would have to compete with other nations that at the time had more resources than they did. Utilizing mercantilist policies increased exports but decreased imports, resulting in inflationary pressure within an economy. This pressure eventually gave way to deflationary pressures because people stopped purchasing items like homes because there wasn't enough money being circulated through exports alone (the primary means by which foreign exchange comes into existence).

It hindered imports while promoting the export of gold and silver

An economic strategy known as mercantilism promotes the export of precious metals while discouraging imports. Maximizing exports while reducing imports is the aim of mercantilism. Making it difficult for countries to trade with one another or even completely preventing it is one way to do this (this was frequently done while the economies of Europe were at war). Mercantilism policies, according to some, have caused several conflicts because they make it harder for nations to do commerce with one another, forcing them to look for trading partners with comparable interests.

A nation's wealth, according to mercantilists, was derived from its gold, silver, or other resources

A mercantile system was one in which traders made money by doing business with one another on distant marketplaces. The word 'mercantile' relates to a merchant or navigator; hence, it describes someone who travels or transacts with products. Instead of just traveling abroad for trade, they were also attempting to increase their domestic wealth through exports, as they believed that doing so would help offset any deficit brought on by importing foreign goods into their economy. Instead of producing goods locally first, then exporting them later when demand increases due to increased local production, they were traveling abroad for trade purposes.

The policy made it challenging for countries to do commerce with one another

A mercantilist policy restricts a nation's ability to trade with other nations. A mercantilist program aims to increase exports while reducing imports, which would strengthen a person's economy and give them greater power. The way it works is that the government places limits on the amount of money that may be spent on imports into their country (what they purchase from other nations) and exports out of their country (what they sell to other nations). As an illustration, Portugal's government may decide not to provide them access if they desire cheaper goods from England or Spain since doing so would harm Portuguese enterprises by lowering their ability to compete in foreign markets. As a result, when Portugal decides how much money should go into its economy or where those funds should go, there will probably be less competition amongst businesses throughout the world that are ready to access global markets.

It is an economic strategy intended to reduce imports and increase exports in a given economy

A strategy known as mercantilism seeks to balance an economy's imports and exports as much as possible. By expanding exports or purchasing products from other nations that a person cannot create or build, mercantilism seeks to improve a nation's wealth and influence. Since they could purchase weapons from other nations without having to pay for them themselves, mercantilists thought that this would help them increase their influence, particularly in terms of military might. These commodities may still be sold at a better price than what they might otherwise be able to receive, even if they aren't immediately required.

Mercantilism's objective

Using domestic resources to increase wealth and power is the aim of mercantilism in a country. According to the underlying idea, if a person has more money, they may purchase more goods from other nations. This will increase a person's riches and power over them, which should also enable them to wage war and take control of new territory (or at least make money off of those). Using domestic resources to increase wealth, power, and reputation was the core principle of the economic system known as mercantilism. It was created to increase exports from a country's economy and decrease imports. The objective of mercantilist policy was for a nation to harness its resources to increase its riches and influence. As a result, nations were unable to freely trade with one another; instead, they had to look for commercial partners that shared their objectives (such as increasing exports). Mercantilism has been founded on the idea that a country's prosperity originated from the gold, silver, or other raw minerals found inside its boundaries.

Several nations have seen economic growth thanks to capitalism

It's vital to keep in mind that every nation has its value system for determining wealth, which may differ from other nations' values. As a result, it is important to take into account the dimensions of the items involved when examining how two countries exchange them. If someone wants to get some Chanel bags from France while a buddy prefers to purchase some inexpensive handbags from China, These wouldn't usually make sense because a $100 purse cannot possibly be worth more than a $300 bag (even though it might technically have more value). If we select a price that is completely determined by supply and demand (which makes logical sense because each country has distinct needs), then at least both parties would receive what they want.