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Mercantilism is the oldest theory of international trade. This theory states that “the holdings of a country’s treasure primarily in the form of gold constituted its wealth”. The main period of the concept of Mercantilism is from 1500 to 1800.

Key Points of this Theory

First and/or oldest theory of International trade

Period 1500 – 1800

Focus on Export and Import activities

Benefits in the form of Gold

Countries treasure / wealth is based on collection of gold

Countries / Governments restrictions on import and …..

Stress on export activities to experience trade surplus (to avoid trade deficit)….

which resulted in trade restrictions or acts as trade barrier

This theory concentrates on the following statement:

“countries should export more than they import and receive the value of trade surplus in the form of gold from those countries which experience trade deficits.”

Theory of Mercantilism emphasizes on the export and export activities of the country and benefits in the form of Gold.

British as an example

At that time British was in the power (colonical power). They used used to trade with their colonies like India, Sri Lanka etc., by importing the raw materials from and exporting the finished goods to colonies.

The colonies like India, Srilanka etc. had to export less valued goods and import more valued goods. Thus colonies were prevented from manufacturing.

British were in trade surplus due to such practices and forced the colonies to experience trade deficits.

Disadvantages/Limitations

There was some disadvantages and limitations of this theory.

This theory concentrates on export activities and collection of gold to experience trade surplus.

So, the theory benefited the colonial powers and caused much discontent in the colonies like India and Srilanka etc.

Root of American revolution

This kind of activities of some colonical powers such as British was the background situation for the American Revolution.

Neo Mercantilism Theory

According to this theory, Import or earning in the form of Gold and export of Goods and services were the main part of the trade balance, but the decay of gold standard reduced the validity of this theory.

Then this theory was modified and called it Neo-mercantilism theory of International Trade.

Proposal or statement of Neomercantilism theory

“countries attempt to produce more than the demand in the domestic country in order to achieve a social objective like full employment in the domestic country or a political objective like assisting a friendly country.”

Assumption or ground for this theory:  the wealth of a nation is based on its available goods and services rather than on gold.

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