Final answer:
Mercantilism is an economic practice aimed at accumulating wealth through a positive balance of trade by minimizing imports and maximizing exports, supported by protectionist policies. Critics argue that it leads to economic inefficiencies and harm to consumers. While trade surpluses and deficits were traditionally seen as inherently good or bad, modern perspectives recognize that the realities are more nuanced.
Step-by-step explanation:
Theory of Mercantilism and Balance of Trade
The theory of mercantilism is an economic philosophy where a nation's strength is derived from its wealth, specifically its accumulation of gold and silver. This wealth was to be gathered through a favorable balance of trade. To do so, nations embraced protectionist policies, such as tariffs, grants of monopoly, and industry subsidies. Critics of mercantilism, like Adam Smith, believed that wealth wasn't a finite resource and that an economy should be regulated by natural competition rather than government interference.
Favorable and Unfavorable Balances of Trade
In international business, a favorable balance of trade occurs when a country exports more than it imports, while an unfavorable balance signifies the opposite. However, trade surpluses and deficits are not intrinsically good or bad. For instance, trade surpluses can indicate a healthy economy, like Germany's, or they may suggest under-consumption or a lack of domestic investment. Conversely, trade deficits, like those in the United States, may lead to domestic job losses in certain sectors, but they can also signify investment into the economy and access to imports that improve citizens' standard of living.