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Executive Summary
Neoclassical Theory is one of the widely used theories in international trade. The theory is based on Hecksher-Ohlin Model. This model emphasizes on the importance of endowment in international trade. It holds that the endowment of a country, in terms of natural resources, defines its ability to be successful in global trade. Other factors of productions, which are always considered important such as labor and technology (capital), are given very little regard in this theory. They are held constant in order to determine how endowment influences production. When using Neoclassical Theory of Trade, the focus will be to determine how endowment may influence production capacity of a country or a firm. The three important stakeholders, when other factors are held constant include the firm, customers, and the government. The firm offers products needed by the customers and tax to the government. Customers give tax to the government and profits to the firm. The government on the other hand, offers law and order to the firm and customers. These three stakeholders are closely related.
Discussion
According to Pugel (2012), the Neoclassical Theory of Trade is based upon Hecksher-Ohlin Theory. In order to understand how Neoclassical Theory of Trade will work, it is necessary to understand the basic concepts of Hecksher-Ohlin Model and its underlying assumptions. According to Appleyard, Cobb and Field (2014), the H-O Model holds that a state’s trade capabilities are largely determined by the endowments of factors. It further argues that the endowment of a country determines its capacity to produce. Its major assumption is that returns to scale are always constant. This theory seeks to determine how endowment of a country may affect its trade abilities when other factors are held constant. This means that important factors such as labor (quality and availability) and technology play a minor role when using this model.
Neoclassical theory can, therefore, be used to compare how two or more countries perform in international trade based on their natural endowment. Important stakeholders in the context of international trade include the consumers, governments, and the relevant firm. The firm offers products to customers and taxes to the government. The customer offers the government taxes and profits to the firm. Government offers both the firm and the customer law and order.
References
Appleyard, D. R., Cobb, S., & Field, A. J. (2014). International Economics. London: McGraw-Hill Education.
Pugel, T. A. (2012). International economics. London: McGraw-Hill Irwin.
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