Question

Explain the difference between neo-classical trade theory (Heckscher-Ohlin) and new trade theories.

Answer 1

The Heckscher–Ohlin model (H–O model) is a general equilibrium mathematical model of international trade, developed by Eli Heckscher and Bertil Ohlin at the Stockholm School of Economics. It builds on David Ricardo's theory of comparative advantage by predicting patterns of commerce and production based on the factor endowments of a trading region. The model essentially says that countries export products that use their abundant and cheap factors of production, and import products that use the countries' scarce factors.

The neoclassical model of trade argues that the production possibilities curve is convex, or that the opportunity cost of producing a good increases as production of the goods increase. This view differs from the Ricardian Model, which assumes constant opportunity costs and a linear production possibilities curve

New trade theory (NTT) is a collection of economic models in international trade which focuses on the role of increasing returns to scale and network effects, which were developed in the late 1970s and early 1980s

New trade theorists relaxed the assumption of constant returns to scale, and some argue that using protectionist measures to build up a huge industrial base in certain industries will then allow those sectors to dominate the world market.