Harberler Theory:

The principle of opportunity-cost basically treated choice between alternative products (or choice between the utilities derivable from the consumption of alternative products) as the only choice that was to be considered for the determination of price. The opportunity-cost theory was first applied to the problem of gain or loss from foreign trade as a substitute for the doctrine of comparative real cost by Haberler, who claimed for it that it was adequate for the purpose and had the advantage over the doctrine of comparative costs that the use of the factors in variable proportions presented no difficulties for it. Harberler's new idea was to reformulate the theory of comparative advantage such that the value of a good X is measured in terms of the forgone units of the production of good Y rather than the labor units that are necessary to produce good X, as in the Ricardian formulation. Haberler implemented this opportunity cost formulation of comparative advantage by introducing the concept of a substitution or production possibility curve into international trade theory. In his presentation, Haberler made use of a production-indifference curve, and the indifference-curve approach which has been further elaborated, on similar lines, by Lerner and Leontief. The opportunity-cost analysis faces difficulties on the real income side of the problem analogous to those involved in real-cost analysis, and that it avoids the difficulties involved in real-cost analysis for the most part only by ignoring the existence of some of the considerations which real-cost analysis takes into account. Haberler, in his later and more qualified exposition of the opportunity-cost theory as a substitute for the doctrine of comparative real costs, does take up the case of equalizing differences in wages to take into account the advantages and disadvantages of different occupations other than the money wages.