ABSTRACT
This chapter analyzes the relative merits of standard Neoclassical trade theory. It summarizes the conditions underlying the "modern" algebraic Heckscher-Ohlin model (AHO). The chapter reviews the older but more theoretically grounded and less restrictive Neoclassical international trade models of Meade and Haberler, who, using graphical techniques in a two-country. It shows that when trading partners have "highly unequal factor costs", as is likely in "north–south" trade, the Meade-Haberler geometric Heckscher-Ohlin (GHO) model will produce imbalanced and probably not mutually beneficial trade. This shows that even in the most general version of Neoclassical trade theory, "free trade" is inconsistent with comparative advantage-based partial specialization when wage levels are highly unequal as they are in most north–south trade. For the sake of analytical completeness, the chapter demonstrates that a similar problem may occur for trade between countries with "very unequal production capacities". It concludes by noting that this analysis of Neoclassical trade theory complements the analysis of classical Ricardian trade theory.
