In a short essay, discuss the theory of mercantilism, and discuss favorable and unfavorable balances of trade as they apply to international business.
Answer: Mercantilism holds that a country's wealth is measured by its holdings of treasure, which usually meant gold. According to the theory, countries should export more than they import and, if successful, receive gold from countries that run deficits. To export more than they imported, governments imposed restrictions on most imports and subsidized production of many products that could otherwise not compete in domestic or export markets.
A favorable balance of trade indicates that a country is exporting more than it is importing. An unfavorable balance of trade indicates that a country is importing more than it is exporting, which is known as a deficit. However, it is not necessarily beneficial to run a trade surplus nor is it necessarily disadvantageous to run a trade deficit. A country that is running a surplus, or favorable balance of trade, is, for the time being, importing goods and services of less value than those it is exporting. In effect, the surplus country is granting credit to the deficit country. If that credit cannot eventually buy sufficient goods and services, the so-called favorable trade balance actually may turn out to be disadvantageous for the country with the surplus.