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What is the fundamental problem of exchange, and how was it solved to permit the revival of long distance trade in medieval Europe? How important was long distance trade to the prosperity of the VenetianRepublic and Portugal?
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What is the fundamental problem of exchange, and how was it solved to permit the revival of long distance trade in medieval Europe? How important was long distance trade to the prosperity of the Venetian Republic and Portugal? The fundamental problem of exchange concerns the trade between merchants of different nation states. Mutual gains between merchants can be achieved through trade, either through absolute or comparative advantage whereby each country specialises in producing a good that can be produced cheaply locally and then traded with other countries. This specialisation, as highlighted by Adam Smith and David Ricardo raises the total aggregate output of the two nations, and the gains are shared. However, for merchants to enter into a mutually beneficial exchange they have to recognise them as such and commit to their contractual obligations, thus raising the question: how can you be sure that the other merchants will fulfil their...
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