International Trade: New Patterns of Trade, Production & Investment

By Nigel Grimwade | Go to book overview

Chapter 3

Intra-Industry Trade and Specialisation

CHAPTER OUTLINES: Introduction. Definitions. Measurement—the Grubel-Lloyd index, the Balassa index, the Aquino formula, the Bergstrand method, the Glejser approach. The Aggregation Problem. The Level of Intra-Industry Trade. The Theory of Intra-Industry Trade—trade in functionally identical products, trade in differentiated commodities. The Determinants of Intra-Industry Trade: the Empirical Evidence—country differences, industry differences, vertical and horizontal intra-industry trade. Conclusion.


Introduction

In the theories of trade examined in the previous chapter, each country specialised in goods in which they enjoyed a comparative advantage and exchanged these products for those in which other countries enjoyed a comparative advantage. Normally, these were the products of different industries, for example, wheat and cloth. This is to be expected where trade is based on differences in comparative costs. If a country has a comparative advantage in one product, it is likely to enjoy a similar advantage in all the products belonging to that industry. Where countries exchange products belonging to different industries, this is called inter-industry trade. Likewise, the kind of specialisation giving rise to such trade is called inter-industry specialisation. However, much of the trade which takes place in the world is of an entirely different kind. Countries exchange products which belong to the same industry. This suggests that countries engage in a narrower form of specialisation, specialising in particular products within a given industry and exchanging these products for other products belonging to the same industry. As a consequence, their exports and imports of products belonging to the same industry increase simultaneously. Such trade is known as intra-industry trade and the kind of specialisation leading to such trade is called intra-industry specialisation.

This distinction is an important one for two reasons. First, it suggests that conventional trade theories are deficient in some respects. Why do countries simultaneously export and import the products of the same industry? An explanation cannot be found within the framework of classical or neo-classical trade theory. The latter predicts only inter-industry specialisation and trade. However, as we saw towards the end of the last chapter, a weakness of

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