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Do you know the difference between Mercantilism & Capitalism ?

In this blog, we would be discussing two important theories of Mercantilism and Capitalism. These theories are the basics of macroeconomics and one should know these theories in order to understand the subject deeper.

Theory 1: Mercantilism

It is a system in which a country attempts to amass wealth through trade with other countries, exporting more than it imports, and increasing stores of gold and precious metals.

Earlier a country's wealth was judged by the amount of gold it used to have. It was a belief that countries with huge gold reserves can dominate the world. So everybody wanted to dominate. More the gold, the more wealthy the nations used to be and hence more dominating. So, How can a country amass gold? Either by digging gold reserves or another option is to sell products to other countries and take the payment in gold. So countries used to export more products and sell them to other countries in order to amass gold and become wealthy. This is what mercantilism theory means.

The same thing happens with us even today. But today the parameters have changed, gold is not the only parameter for wealth. But in general more the exports more the foreign currency comes into the country and the more wealthy a nation becomes. That is why the government has started to focus on making in India to curb imports from china because when we import from china we lose our wealth to china.

In the current situation, China relies on exports to amass wealth and in turn aspires to dominate the world. How is China doing this?

Let us analyze. China Exports a lot and in turn earns huge income or wealth. It then uses this to give loans to other countries and when they are not able to repay, china asks for a strategic thing from the country in order to waive off the loan. The thing might be such as getting access to one of the major ports of the country. This is called China's Debt trap policy.

Now you might understand why wealth is so important for any nation.

Theory 2 Capitalism :

It is the economic system in which businesses are owned and run for profit by individuals and not by the state. There is Private ownership of means of production which are land, Labour, Capital, and Entrepreneurship.

Here Firms are the production units. They produce products by using labor supplied by households. There is the sale and purchase of labor services at a price which is called the wage rate. The products made are then sold in the market for profit. The state (Government ) frames laws and enforces them to avoid exploitation of labor.

The production of goods and services is based on supply and demand in the general market. Here the production takes place for selling goods and products in the market.

It depends on the enforcement of private property rights, which provide incentives for investment in and productive use of productive capital.

The purest form of capitalism is free market or laissez-faire capitalism. In this, the individual is free to make decisions for himself and there is no restriction. He may determine where to invest, what to produce or sell, and at which prices to exchange goods and services.

Today, most countries practice a mixed capitalist system that includes some degree of government regulation of business and ownership of select industries. For example in India, some sectors like railways were earlier reserved for the government only.

For a deeper understanding of the concept visit:

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Authored by: Bhishm Tahiliani


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