Chapter 14 Inter- & Intra-Industry Trade

1. Chapter 14Inter- & Intra-Industry Trade

2. Inter- & Intra-Industry Trade • Inter-Industry Trade refers to international exchange of widely dissimilar goods. • Eg. export automobiles & import clothing. • Such trade stems from differences in countries. • Ricardian model: differences in labor productivity. • HO model: variations in factors endowment by country & factor intensities by commodity. • Follows this, Inter-Industry trade will take place between countries that are with great differences. -   Eg, between developed & developing countries, between capital abundant & labor abundant countries. • But: • In 1990, 57% of world exports are among developed countries. • Most of the trade was in manufacturing products which involving intra-industry trade (import & export similar goods).

3. Intra-Industry Trade Model or IIT Model • Possible sources of intra-industry trade: • IndustryClassification • Transportation Costs • Product Differentiation • Increasing Returns to Scale

4. i. Industry Classification • Some trade flows are misleadingly measured as IIT because of the industrial classification system. • Eg: • US export fruits during summer & import them during winter. • However, trade flows are reported on a calendar-year basis.. • High-wage nations’ producing sophisticated components of electronics products, exporting them to low-wage nations for assembly into final goods, then importing the final products. • However, exports of component & imports of final goods tend to be counted in the same trade categories.

5. ii. Transportation Costs • For many products, shipping costs are high in relation to their market value. • High transportation cost imply that markets for heavy & inexpensive goods (like cement, bricks & lumber) are limited geographically. • Localized markets might across national borders. • Eg: Lumber is exported from British Columbia in Canada to Washington in US; simultaneously Quebec in Canada import lumber from Maine in US.

6. iii. Product Differentiation • Assumption in traditional trade theory is that goods are homogeneous. • However, many commodities, especially manufactured goods, are differentiated by style & quality. • Eg: Automobiles vary in size, power, comfort, performance & appearance. • Imported goods & similar domestic goods are seen by consumers as imperfect substitutes.

7. iv. Increasing Returns To Scale • If industry in each country tend to produce a relatively small range of differentiated goods, each subject to increasing returns @ lower costs. • It is inefficient for each country to produce many differentiated goods in small quantity. • Beneficial trade exists when each industry in each country produce a few differentiated goods. • Enjoy scale economies. • Eg. US produces car & German produces truck.

8. Intra-Industry Trade (IIT) Index • Intra-Industry Trade(IIT)Index : where X & M are values of export & import for certain industry. • T has the value between 0 to 1. • When T = 0, country solely export or solely import (no IIT @ fully inter-industry trade). • When T = 1, IIT is maximum (X = M @ fully intra-industry).

9. Intra-Industry Trade (IIT) Index • T has the value between 0 to 1. • When T = 0, country solely export or solely import (no IIT @ fully inter-industry trade). • When T = 1, IIT is maximum (X = M @ fully intra-industry).

10. Intra-Industry Trade (IIT) Index • Problems of IIT computation: • When the classification becomes more general, IIT index tends to become larger. • Tends to ‘overstate’ the true amount of IIT by lumping together goods that really are not very similar (aggregated commodity groups)