Intra-Industry Trade

In studying some economies, three contradictions were found:

Much of the trade was found between countries with similar factor endowments.

A large part of the trade is IIT.

Trade expansion not with sizeable reallocation of resources or income distribution effect

Theories based on differences cannot explain these contradictions. Therefore, IIT emerged.

Here are some reasons for IIT:

Differentiation of consumption and production

Economies of scale at the firm level and industry level lead to country-specific goods.

Categorisation

Geographical and seasonal problems

Degree of processing in terms of value added

Measurement of IIT

For a good j with exports X_j and imports M_j, the level of IIT, B_j is:

B_j is a percentage from 0 to 100:

When B_j = 0, all inter-industry trade

When B_j = 100, all intra-industry trade

Categorisation Problem: Opposition Effect

When we consider the IIT with more than one good, there is a problem where the two goods can cancel each other out.

For example, with two goods, the combined IIT is:

Suppose M₁=0 and X₂=0. Now, even if (X₁ - M₁) and (X₂ - M₂) are non-zero, their sum can still be zero.

To address this problem:

Check B for each disaggregate level

(But how much is substantial?)

Regroup industries with the same characteristics

(But how can we justify that the re-grouped data are better?)

Compute an adjusted index of IIT

Imperfect Competition

Trade Policies

Basic Models

Copyright © 1997, 1998, 2001 Dr MoonJoong Tcha
(mtcha@ecel.uwa.edu.au)

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