Explain the neoclassical theory of international trade. What are the underlying assumptions?
Neoclassical theory has been successful because it is simple (though it may not always look simple when you’re learning it). For example most neoclassical trade theories assume that the world only has two countries (which means that country A’s exports must be country B’s imports). They also usually assume only two commodities in international trade. If you try to “generalize” by adding more countries or commodities, the math breaks down and you don’t get clear results.
One of the most important, and limiting, assumptions in neoclassical trade theory is that firms produce under conditions of perfect competition. Any industry that is controlled by a small number of firms is not perfectly competitive. There is a whole area of economics, initially developed by Joan Robinson in the 1920's, that explores what happens under imperfect
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