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How did medieval merchants solve the fundamental problem of exchange in long distance trade? What light does this shed on the prosperity of the Venetian Republic and Portugal before 1700?

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How did medieval merchants solve the fundamental problem of exchange in long distance trade? What light does this shed on the prosperity of the Venetian Republic and Portugal before 1700? Trading has been an elementary part of economies since the advantages of it were discovered. The ability to exchange goods greatly contributes to economic efficiency as it enables us to capture gains from natural comparative advantage and division of labour. There are evident gains from trade when a country has an absolute advantage in the production of a good. A country is said to have absolute advantage in production if it can produce the same amount of output with less inputs relative to other countries. This brings about a stronger economy, as there is greater specialisation and technical innovation, which has positive impact on the economy in the long run. There are also gains in trade when a country has a comparative advantage in the production of a good. This is when the opportunity cost for producing a good is lower than that of another country. This results in a higher aggregate output, which means that gains can be split between both countries. The fundamental problem of exchange has existed since the advantages of trade were discovered. It says that even if there are potential gains from trade, trade may still not occur as the lender will not want to lend without being assured that the borrower will not invest the money in a hopeless venture, or take the money and run. ...read more.


The fact that reputations also took a long time to build up and could be quickly erased made them of extreme value to people. It was also possible to use strategic marriages and trade through families if you wanted to be sure both sides of a trade were secure. As a medieval ruler would have a local monopoly of the area he ruled, he would be faced with the temptation of abusing his power and appropriating merchants. Merchants therefore devised a solution to combat this problem, which was by organising a boycott of a state that abused the rights of a merchant. This deters predatory behaviour by the ruler, as it is not desirable to deprive the population, the ruler and the merchants the benefits of trade. It therefore has the potential to work very well, but the problem is that it can be very difficult to sustain as some merchants may see ways of maximising their personal gains by renegotiating with the ruler, causing the boycott to deteriorate. It was therefore vital if planning a state boycott to ensure rules were set out to prevent this from happening. Venice played a major role in re-opening the Mediterranean economy to western European commerce after the post-Roman Empire collapse, and the establishment of effective protection for merchants was crucial in this. ...read more.


This can be seen when looking at figures for per capita income before the nineteenth century, which gives an estimate of the per capita income of Portugal of $632. This is far lower than other relatively similarly dominant economies, such as Italy and Belgium, who had per capita incomes of $1100 and $875 respectively. The reason for this can be given by the fact that in general, agriculture and industry were the determining factors when analysing the per capita incomes, and in Portugal these industries were quite underdeveloped relative to other countries. In comparison to Portugal, Venice was far more prosperous. Not only when looking at the per capita incomes, but also when seeing how much more developed the Venetian institutional framework was. It was formed to be favourable to merchant capitalism, which vastly strengthened its trading platform as a country, and therefore the amount of money it was able to make. Trading was only possible through solving the fundamental problem of exchange. Over time, ways of solving the problem became more sophisticated; from using boycotts and networks of trust, to legal frameworks and courts of law. We have been able to become more affluent as economies due to the advantages that trade brings us, as can be seen looking at examples of economies from hundreds of years ago that first experienced the prosperity that trade brought. We have also been able to see the importance that institutions hold in nurturing and maintaining an environment that is favourable to trade, namely in Venice. ...read more.

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