Answer to Question #182844 in Microeconomics for Laurene Tientcheu

Question

Write at least 3 main differences in the assumptions of the classical models (absolute advantage and comparative advantage) of trade and the neo-classical model (HO) model.

Answer 1

1. In Classical Theory, it is the difference in the technology that determines the position of trade. It is the technological difference between two trading countries as reflected in their respective labor productivity ratio, which form the basis of trade. In contrast to Classical Theory, Neoclassical Theory, it is the difference in the, factor endowments that determine the pattern of trade. It is the difference in relative factor endowment between two trading countries which form the basis of trade.
2. The Classical Theory has an assumption that production in all the countries is subject to constant returns to scale. But Neoclassical Theory has released the assumption of constant returns to scale in order to allow for decreasing return to scale.
3. The Classical Theory believes that two countries differ in technology to produce the goods. Neoclassical Theory believes that two countries have the same technologies to produce goods.