ECS3705 Exam Questions AND ANSWERS

LU 1: Mercantilists, physiocrats and classical forerunners Explain Fear of Goods: One of the principles of the Mercantilist school is duty free importation of raw materials that could not be produced domestically, protection for manufactured goods and raw materials that could be produced domestically and export restrictions on raw materials. Emphasis on exports & a reluctance to import has been called the fear of goods. Brielfy explain bullionism: Bullion is another word for plain bars of precious metals. These bars have not been minted or coined. The idea that wealth is equal to precious metal money and that a nation’s wealth therefore consists of the total amount of gold and silver within its borders. Explain the relevance of mercantilism in its time. Mercantalism in its time, entailed the arguments for bullionism, which made sense in this period of transition between a self-sufficient economy of the Middle Ages and the money and credit economy of the modern times. Wars were also fought on a pay-as-you-go basis and bullionism provided a reserve that could be used to win wars. Mercantilism also acknowledged that the influx of precious metals made tax collection easier, as well as that increases in the amount of gold and silver in circulation reduced interest rates and promoted business. Exaplain the lasting contributions of mercantilism: Although mercantilism contributed very little to economic theory, a few tenets became lasting contributions. Mercantalism made a lasting contribution to economics by emphasizing the importance of international trade. They developed the economic and accounting notion of what today is termed the balance of payments. They also indirectly contributed to economics and economic development. They also influenced the attitudes toward the merchant, by increasing respect and importance of the merchant to the economy. Merfcantilism also provided a lasting contribution by indirectly promoting nationalism which is clearly relevant today. Internal markets were expanded and a promotion of free movement of goods between countries. Briefly explain the physiocrats argument in favour of the taxation of the rent received by the landlords. Physiocrats thought that industry, trade and other professions were sterile and only agriculture was productive. Land is therefore equal to rent. Physiocrats thought that because only agriculture produced a surplus, which the landowner received in the form of rent, only the landowner should be taxed. All taxes imposed on others would be passed on to the landowners anyway. A direct tax on landowners was preferable to indirect taxes, which increase as they were passed along to others. They also regarded rent as partially unearned income, which is part of the reason why they wanted to tax it as well. Explain Tableau Economique: Quesnay, whom formed part of the Physiocratic school, constructed the Tableau economique for the king of France in 1758 and revised it later. It depicted the circular flow of goods and money in an ideals, freely competitive economy. This was the first systematic analysis of the flow of wealth on what later came to be called a macroeconomic basis. Quesnay assumed that land is owned by landlords but is cultivated by tenant farmers, who are therefore the only productive class. The products that the tenant farmers create has to satisfy not only their own needs but also the needs of the landowners. In addition the output of the farms provides for the needs of the sterile class (manufacturers & merchants). The tableau shows how the net product circulates among the three classes and how it is reproduced each year. Briefly explain land as a production factor: Explain the role of “tax shifting” in physiocratic thought. Tax shifting occurs, for example, when a manager of a big corporation makes his salary demands in after-tax terms, which means that the income tax is effectively borne by the firm rather than the manager on whom it is levied. The physiocrats argued that all taxes were eventually borne by the landowners because of tax shifting, so that one might as well tax their income directly. In general, the degree of tax shifting, as with the passing on of any cost increase, depends on the relative market power of those on whom it is levied. For example, when management skills are scarce, managers may have the market power to shift their tax payments onto firms and negotiate their salary in after-tax terms. The role of “the natural order” and “the rule of nature” in physiocratic ideas. Natural order. The physiocrats introduced the idea of natural order to economic thinking. The term physiocrat itself means “rule of nature.” According to this idea, laws of nature govern human societies just as those discovered by Newton govern the physical world. All human activities therefore should be brought into harmony with these natural laws. The object of all scientific study was to discover the laws to which all the phenomena of the universe were subject. In the economic sphere, the laws of nature conferred to individuals the natural right to enjoy the fruits of their own labour, provided that such enjoyment was consistent with the rights of others. Major tenents of mercantilism:  Gold and silver the most desirable form of wealth. Mercantilists tended to equate the wealth of a nation with the amount of gold and silver bullion it possessed. A few early mercantilists even believed that these precious metals were the only type of wealth worth pursuing. All of them valued bullion as the way to achieve power and riches. A surplus of exports from a country was therefore necessary to generate payments in hard money. Even when at war, nations would export goods to the enemy as long as the products were paid for in gold.  Nationalism. All countries could not simultaneously export more than they imported. Therefore one’s own country should promote exports and accumulate wealth at the expense of its neighbours. Only a powerful nation could capture and hold colonies, dominate trade routes, win wars against rivals, and compete successfully in international trade. According to this static concept of economic life, there was a fixed quantity of economic resources in the world; one country could increase its resources only at the expense of another.  Duty-free importation of raw materials that could not be produced domestically, protection for manufactured goods and raw materials that could be produced domestically, and export restriction on raw materials. This emphasis on exports and a reluctance to import has been called “the fear of goods.” The interests of the merchant took precedence over those of the domestic consumer. Merchants received inflows of gold in return for their exports, while