The classical theory of international trade, associated with the names of Smith, Ricardo, Mill, Marshall, Taussig, Haberler, and others, is handicapped by its adherence to labour theory of value.
Moreover, it assumes that, somehow, the productive efficiency of labour in producing a commodity depends upon the country in which it is produced. It recognises, at the most, only such reasons for cost differences as climate and soil productivity, etc.
Modern theory, also known as Heckscher- Ohlin Theory or Factor- Endowments Theory, identifies differences in factor endowments of countries and factor intensity of different products as the primary reasons for comparative cost differences but in a narrow and static sense of the term and ignoring long term changes in it.
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These days, a wide variety of additional causes of inter-country cost differences have been identified. We can, for example, state that the following dimensions of the trading economies influence the pattern and volume of their trade.
Their technological contours which in turn are affected by several factors like investment in human capital research and development total factor productivity and so on.
i. Attitude of their labour force towards work.
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ii. Efficiency of their financial systems.
iii. Fiscal and monetary policies pursued by the authorities.
iv. Efficiency of the government administration.
v. Their labour laws and social security system.
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vi. Structure and extent of competitiveness of their markets.
vii. Infrastructural facilities and so on.
It is very difficult to compile an exhaustive list of all the influencing factors and quantify their individual contributions, more so because each factor exerts its influence on the cost structure of the economy both by itself and in conjunction with other influencing factors.