Salvatore’s Introdu ction to International Economics, 2nd Edition Instructor’s Manual Copyright © 2010 John Wiley & Sons, Inc. 7 *CHAPTER 2 (Core Chapter) COMPARATIVE ADVANTAGE ANSWERS TO REVIEW QUESTIONS AND PROBLEMS 1. The mercantilists believed that the way for a nation to become rich and powerful was to export more than it imported. The resulting export surplus would then be settled by an inflow of gold and silver and the more gold and silver a nation had, the richer and more powerful it was. Thus, the government had to do all in its power to stimulate the nation’s exports and discourage and restrict imports. However, since all nations could not simultaneously have an export surplus and the amount of gold and silver was fixed at any particular point in time, one nation could gain only at the expense of other nations. The mercantilists thus preached economic nationalism, believing that national interests were basically in conflict. Adam Smith, on the other hand, believed that free trade would make all nations better off. All of this is relevant today because many of the arguments made in favor of restricting international trade to protect domestic jobs are very similar to the mercantilists arguments made three or four centuries ago. That is why we can say that “mercantilism is alive and well in the twenty-first century”. Thus we have to be prepared to answer and demonstrate that these arguments are basically wrong. 2. According to Adam Smith, the basis for trade was absolute advantage, or one country being more productive or efficient in the production of some commodities and other countries being more productive in the production of other commodities. The gains from trade arise...
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