3.3.3 Weaknesses of early theories

The theories outlined above have a number of weaknesses:

They all assume:
- the existence of perfect knowledge concerning international markets and opportunities
- full labour employment within each country
- full mobility of labour and other factors of production within each country; and
- that each country has an objective of full production efficiency.
They neglect other motives for trade such as tradition, self-sufficiency and political objectives.
They deal only with two commodities and two countries. In reality there are multiple commodities, countries and factors, and complex interactions between all of these.
The cost focus was on labour. Transportation and the use of land and capital were not considered.

We should pause here to compare what you have just read with what is written in your textbook.

In your text

Hill 2005, Chapter 4, pp. 143-157.

Activity 3.2

In three sentences, explain whether an understanding of mercantilism is still relevant to understanding international trade.