This institutional, legal and social set ups

This is because of time-lag between initial discovery and adoption of technological innovations in one country and its spread to others. In addition, each country has its own institutional, legal and social set ups which prevents them from having “same technology”. Trading costs, trade restrictions, absence of constant returns to scale and absence of perfect competition also prevent complete equalisation of factor prices.

Non-comparable size of trading economies is a common occurrence. This fact not only comes in the way of complete specialisation but also prevents complete equalisation of factor prices. The Small Country Case: It can be intuitively seen that if the economies of the trading countries are not of comparable size, then the “small” country may not be in a position to meet the entire consumption needs of the other country. This would result in incomplete specialisation of the larger economy. It would produce a part of the imported commodity to meet its excess (unsatisfied) demand.


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