Good Example Of Essay On How Neoclassical Is International Economics?studentcodesubjectuniversitycoursedate

Type of paper: Essay

Topic: Economics, Theory, Business, Commerce, Trade, Factor, Development, Countries

Pages: 5

Words: 1375

Published: 2020/11/26


In the modern era international economic policy has been changed its features significantly from its orthodox and conventional way. In this specific paper it has been discussed that how neoclassical is an international economics. The World Bank (WTO), the major international economic institution IMF and the major economics mostly suggest of free trade and explain their private views on the economical developing country. As the developing countries are trying to achieve its economical development by applying several protections, it can be found that in spite of it the countries have failed to achieve its goal of significant economic development (Ayres and Warr, 2009). It can be also noticeable that in the past two decades or so most of the countries are constructing its economic policy based on the formulation of orthodox neoclassical economists. Now here it is very important to say that neoclassical economies as well as the neoclassical economists are often described as ‘reformers’ which suggest that these economists advocate more assurance on markets and they are said to be more protected against imports. However all of the approaches taken to lift the economical condition of developing country have not produced the desired result as most the growing economy of the world have recorded a little improvement in their economical condition (Zafirovski, M., 2000, pp. 448-471). Additionally it can be mentioned that for the country like China that has registered a significant improvement in its economy for the freedom regarding to its market in the past decade whereas the growth rate of US economy is significantly lower in past few years. In the modern economy the income inequality that hampers the global economy growth to a quite extent can be observed within most of the countries. Also the factor of unemployment rate is going up in most of the developing countries has signaled the lesser economical growth and that is a concern for most of the countries as well as to the global economy.

Neoclassical Theory

In this section two of the most important neoclassical theories are verified to determine the currency price according to the theory supportive. The two theories are Purchasing Power Parity and the Monetary Model. These theories are selected as those are very popular and they can be presented as long term theories.

Purchasing Power Parity

There is a specific equation in the said Purchasing Power Parity that is ¥/$ = P¥/P$
The particular equation tells the absolute Purchasing Power Parity. Here ¥/$ is the ratio of Yen and dollar and P¥ signifies the average pricing of any services or goods in Japan. On the other hand P$ signifies the average pricing of any services or goods in the United States (Harvey, J.T., 2005, pp. 161-179). Now after analyzing of the given equation it can be noticed that if the relation of left hand side and the right hand side cannot be held and there are no taxes to be paid, no transaction cost or transportation cost have to be paid then it signifies that one countries commodity and product is cheaper than that of other. In this way the trade balance of exchange rate can be worked in a systematic way.

Monetary Model

The Monetary Model is an approach to create a domestic macroeconomic model with the help of monetarist and Purchasing Power Parity. First of all the monetarist suggestions of determining the price is solved by an equation of P = MV/y where P stands for domestic pricing, M is for money supply, V stats the velocity of cash and y is the real output. Now by substituting ¥/$ = P¥/P$ and P = MV/y equation a new equation can be found that is ¥/$ = (M¥V¥/y¥)/(M$V$/y$).
The process is extremely complicated though. In this case also the trade balance is the main thing where as other variables have been adjusted according to it (Berg, 2014).

Justification of neoclassical theories

The Heckscher-Ohlin Theory
The Formal Theory
The Heckscher-Ohlin Theory clarifies that a country’s business or trade is mainly structured by its fundamental factors. That means when the purchaser of a country maximizes their welfare the equilibrium and the quantities of each factors can occur in free type of trade and it allows the country to be endowed. But there are two problems associated with the theory that have to be explained. The first possible and significant problem is the method of implementation. To be proved useful the theory has to be certified and tested to a larger prospective. In order to certify that practical experiment have to be done. But it is so general that it cannot produce any particular explanation to design a pattern of a trade or the pricing related to the trade. The second faceable problem is that the Heckscher-Ohlin Theory is applied only if a country has exported its products that use effectively the factors that it is comparably abundantly endowed. Therefore to be meaningful there should be two assumptions to make, one is relative intensity and the other one is consistent abundance of comparable abundance (Jin, 2009).

Two Factors

Two important factors have to be discussed in the process. Those are The Leontief Paradox and Factor Price Equalization
The Leontief Paradox
As the theory did not pass its first and most essential test therefore a factor need to be discussed here. In the early part after the Second World War US used to spend more capital in import of goods rather than exporting of it. That is the Leontief Paradox (Moosa, I.A., 2007, pp. 169-185). In order to implement the factor several objections were come in the way regarding to the method employed. But according to some of the main stream economists the validity of the theory and the calculations related to it are not acceptable. The improvements did not show the result which is assumed. Therefore they said the theory should be abandoned.

Factor Price Equalization

The Factor Price Equalization is a test of the predictions made by the theory. According to the theory the trade of a country will raise the pricing of factors compared to the prices of products. Some of the specific ways have been discussed in the section to show it. To avoid the factor price equalization it can be seen that if the factor prices cannot be equalized then one has to find a way to show how it can be equalized. In a second way one can make the assumption that the production functions are not all the same in every country (Leclerc and Hall, 2007). This is a specific modification that most of the economists have tried to avoid. Thirdly the assumption of factor reversals can remove the specific correspondence between the products and its pricing that can lead to factor price equalization. Most importantly in this sense the workers of any developing country can be said not genetic but it actually comes from birth and it is passed to the next of the generation.


Through the process of analysis a general portrayal of international trade can be assumed by the possibility of production and the costs or rates of the goods and products of a country uses. Even though the present freedom of business between two countries is an evidence of lesser trade barriers, the distribution of income cannot be seen to be equal. In the modern era one can find such issues with neoclassical theories but one must not forget this is the base of modern economy (Pomfret, 2008). By making some changes to the orthodox and more conventional theories the economic conditions can be reform to a newer version. Therefore to achieve that sort of goal highly efficient economical model has to be designed by the economists by using newer set of information and theories. The final question that has arrived is how many people of a developed country have faith towards this type of theory. The answer is probably a negative one. The people are waiting for more improved versions of the theories that will pass the test and will prove efficient for global economics.


Ayres, R. and Warr, B. (2009). The economic growth engine. Cheltenham, UK: Edward Elgar.
Berg, H. (2014). International Economics. Hoboken: Taylor and Francis.
Chow, C. (2011). Better the Devil We Know: How Sociology Informs the Debate Over Antidumping Laws.
Harvey, J.T. (2005) Post Keynesian versus Neoclassical Explanations of Exchange Rate Movements: A Short Look at the Long Run, in: Journal of Post Keynesian Economics, Vol. 28, No. 2 (Winter, 2005-2006), pp. 161-179.
Jin, K. (2009). Essays on international trade and macroeconomic dynamics.
Leclerc, G. and Hall, C. (2007). Making World Development Work. Albuquerque: University of New Mexico Press.
Moosa, I.A. (2007) Neoclassical versus Post Keynesian Models of Exchange Rate Determination: A Comparison Based on Nonnested Model Selection Tests and Predictive Accuracy, in: Journal of Post Keynesian Economics, Vol. 30, No. 2 (Winter, 2007-2008), pp. 169-185.
Pomfret, R. (2008). Lecture notes on international trade theory and policy. Hackensack, NJ: World Scientific.
Zafirovski, M. (2000) The Rational Choice Generalization of Neoclassical Economics Reconsidered: Any Theoretical Legitimation for Economic Imperialism?, in: Sociological Theory, Vol. 18, No. 3 (Nov.), pp. 448-471.

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