Neoclassical Model of Trade

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. The neoclassical model proposes that as countries specialize and develop comparative advantage at producing one good or another, the opportunity costs will increase or decrease in at exponential rates. This is because a country’s decision to produce, for instance, fewer of one good in which it has comparative and instead produce another in which is has less skill will cause increasingly large opportunity costs; although the initial resources used to begin producing the new good would be those with the most comparative advantage at producing that good (whether raw materials, technology, human capital, etc), continued production would necessitate the use of less efficient resources that could, theoretically, best be used in the production of the first good in which the country has more of a comparative advantage.

Grieco, Joseph M. and G. John Ikenberry. State Power and World Markets W. W. Norton and Company: London, 2003.