Ch2.TheRicardianTradeModelExportsurplusExportexpensivegoodsandonlyimportinexpensiverawmaterialsExportinlowerprice,ifexportarerestrictedbymarketpowerGoldandsilverisonlywealthofcountryGovernmentcontroltheimportandprovidesubsideforexportThemercantilistwriterswereconcernedwithfindingouthowacountrymightincreaseitsexportsurplus.Theythoughtthatthecountryshouldimportsinexpensiverawmaterialswhileexportingexpensive,manufacturedgoods:themoreacountrycouldsellabroadofthevalueaddeddomestically,thewealthieriswouldbecome.Theythereforeproposedtotherulersofthetimethattheyshouldrestrictimportsandstimulateexportsthroughstrictforeigntraderegulations.Tightimportrestrictionswereimposedonexpensiveluxurygoods,whiletheexportsofmanufacturedgoodsaswellastheimportsofrawmaterialswereencouragedthroughgovernmentsubsidiesandtheestablishmentofgovernmentalorstate-subsidizedcommercialenterprisesandproductionfirms.Themercantilistideasneverdiedcompletely.Eventoday,itispossibletofindquitestrongelementswhicharebasedonthem,suchasso-calledneoprotectionism.2.ThechallengetoMercantilismbyearlyClassicaleconomistTheassumptionP-S-FmechanismFormallinkbetweenmoneyandprice,suchasquantitytheoryofmoneywhenfullemploymentisassumed.MV=PYDemandfortradegoodsispriceelastic.Itisensurethatanincreaseinpricewillleadtoadecreaseintotalexpendituresforthetradegoods.Perfectcompetitioninbothproductandfactormarkets.Thattoestablishedlinkwithwagebehaviorandpricebehavior,aswellastoguaranteethatpriceandwagesareflexibleinbothanupwardandadownwarddirection.Agoldstandardexists.Governmentdonotoffsettheimpactofthegoldflowsbyotheractivitiestoinfluencethemoneysupply.Ifalloftheseassumptionsaresatisfied,theautomaticadjustmentmechanismwillallowingtimeforresponsestooccur.3.Absoluteadvantage3.1AdamSmithAdamSmith(1712—1790),aScottisheconomist,ProfessorofmoralphilosophyinGlasgow,publishedabook"WealthofNations."(1776)Inthisbookheemphasizedtheimportanceofdivisionoflaborandspecialization.Healsoridiculedthefearoffreetradebycomparingnationsandh