Differences between New Trade Theory and Traditional Trade Theory

The biggest difference between the new trade theory and the traditional trade theory lies in the different theoretical assumptions. The traditional trade theory is based on the assumption of constant return to scale and perfect competition, while the new trade theory is based on the assumption of increasing scale trade and imperfect competition. It can be said that the new trade theory is a dynamic development of the theory of comparative advantage, which is closer to the reality of modern international trade.

Then there are the different ideological origins of the theory: the ideological essence of the classical trade theory represented by Smith can be summarized into two aspects: (1) market competition can maximize social welfare in the process of resource allocation; In the theory of comparative advantage, specialized production increases the total wealth of society. (2) Division of labor can improve productivity and is limited by market scope.

There are also different trade models: the traditional trade theory is inter-industry trade between developed and developing countries; The new trade theory is intra-industry trade.

In fact, the new trade theory (imperfect competition and economies of scale, product life cycle theory) and the traditional trade theory (classical and neoclassical trade theory) come down in one continuous line, and they are essentially comparative advantage theories-

Whether it is the difference in productivity and resource endowment between classical and neoclassical, or the difference in economies of scale and life cycle in modern trade theory, it is to show that the differences of various production factors in different countries lead to different comparative advantages, and trade will bring about an increase in welfare.