What are weaknesses of the theory of mercantilism? (Choose TWO.)

Mercantilism is an economic theory advocating for a positive balance of trade through protectionist policies like tariffs and quotas. Its primary weaknesses are that it creates a distorted, inefficient allocation of resources by forcing a country to produce goods it is not naturally suited to produce, instead of importing them more cheaply. This protectionism and lack of specialization, combined with a focus on accumulating gold rather than enhancing productive capacity, ultimately hinders long-term economic growth and reduces the nation's real wealth and standard of living.

C. The theory emphasizes comparative advantage.

This is incorrect. The theory of comparative advantage, developed by David Ricardo, is a direct critique of and alternative to mercantilism.

D. The theory promotes free trade.

This is incorrect. Mercantilism is the antithesis of free trade; it is fundamentally based on protectionism and government intervention to restrict imports.

E. The theory encourages specialization and productivity growth.

This is incorrect. By promoting self-sufficiency and protecting domestic industries from foreign competition, mercantilism discourages specialization and stifles productivity growth.

1. Krugman, P. R., Obstfeld, M., & Melitz, M. J. (2018). International Economics: Theory and Policy (11th ed.). Pearson. In Chapter 2, the text contrasts mercantilism with modern trade theories, highlighting its "zero-sum" view and how later theories (Smith, Ricardo) showed that trade is a positive-sum game that increases global efficiency and wealth (pp. 12-14).

2. LaHaye, L. (2017). Mercantilism. In The Library of Economics and Liberty. Retrieved from https://www.econlib.org/library/Enc/Mercantilism.html. This source notes, "mercantilists advocated high tariffs... The goal of these policies was to reduce imports and increase exports... Adam Smith refuted the idea that the wealth of a nation is measured by the size of the treasury."

3. MIT OpenCourseWare. (2010). 14.01 Principles of Microeconomics, Fall 2007. Lecture 2: Apply Supply and Demand. The principles discussed show how restricting trade (a mercantilist policy) moves an economy away from an efficient allocation of resources.