COMPARISON BETWEEN CLASSICAL THEORY AND MODERN THEORY OF INTERNATIONAL TRADE

Modern theory of international trade differs from the classical comparative cost theory in many ways and is also superior to the latter.

(i) According to the classical economists, there was need for a separate theory of international trade because international trade was fundamently different from internal trade. Heckscher and Ohlin,’ on the other hand, felt that there was no need for a separate theory of international trade because international trade was similar to internal trade. The difference between the, two was one of degree, and not of kind.

(ii) The classical economists explained the phenomenon of international trade in terms of the old, discredited labour theory of value. The modern theory explained international trade in terms of the general equilibrium theory of value.

(iii) The classical theory attributes the differences in the comparative advantage of producing commodities in two countries to the differences in the productive efficiency of workers in the country. The modern theory attributes the differences in the comparative advantage to the differences in factor endowments.

(iv) The classical theory presents a one-factor (labour) model, while the modern theory presents a more realistic multi-factor (labour and capital) model.

(v) The classical theory never took into account the factor price differences, while the modern theory considers factor price differences as the main .cause of commodity price differences, which, hi turn, provides the basis of international trade,

(vi) The classical theory does not provide the cause of differences in comparative advantage. The modern theory explains the differences in comparative advantage in terms of differences in factor endowments.

(vii) The classical theory is a single market theory of value, while the modern theory emphasizes the importance of space element in international trade and involves a multi-market theory of value.

(viii) The classical theory is a normative or welfare-oriented theory, .whereas the modern theory, is a positive theory. The classical theory tries to demonstrate the gains from international trade, while the; modern theory concentrates on the basis of trade.