8/7/2019 Intra Industry Trade Theory

1/2

8/7/2019 Intra Industry Trade Theory

2/2

The most comprehensive and widely accepted explanation, at least within economic

theory, is that ofPaul Krugman's New Trade Theory. Krugman argues that economies

specialize to take advantage of increasing returns, not following differences in regionalendowments (as contended by neoclassical theory). In particular, trade allows countries

to specialize in a limited variety of production and thus reap the advantages of increasing

returns (ie, economies of scale), but without reducing the variety of goods available forconsumption.

Yet, Donald Davis believed that both the HeckscherOhlin and Ricardian models were

still relevant in explaining intra-industry trade. He developed the Heckscher-Ohlin-

Ricardo model, which showed that even with constant returns to scale that intra-industrytrade could still occur under the traditional setting. The Heckscher-Ohlin-Ricardo model

explained that countries of identical factor endowments would still trade due to

differences in technology, as this would encourage specialization and therefore trade, inexactly the same matter that was set out in the Ricardian model.

Types: There are three types of intra-industry trade

1. Trade in Homogeneous Goods.

2. Trade in Horizontally Differentiated Goods.

3. Trade in Vertically Differentiated Goods.

Measurement

Intra-industry trade is difficult to measure statistically because regarding products or

industries as "the same" is partly a matter of definition and classification.

For a very simple example, it could be argued that although a BMW and a Ford are bothmotor cars, and although a Budweiserand a Heineken are both beers, they are really alldifferent products.

Various indexes of IIT have been created, including the GrubelLloyd index, the Balassa

index, the Aquino index, the Bergstrand index and the Glesjer index. Research suggeststhat

IIT is not simply a fiction or artifact produced by statistical classifications and

definitions, but very much a reality.

The share of IIT in total international trade is growing all the time, at about 45%a year. Thus, more and more, countries are importing the same kinds of productsthey are also exporting.

"Intra-industry trade has been considered in international trade literature as the

explanation of the unexpectedly large expansion of industrial trade among OECD

countries, for which it represented more than two-thirds of their total international tradeby the beginning of the seventies."

http://en.wikipedia.org/wiki/Paul_Krugmanhttp://en.wikipedia.org/wiki/Neoclassical_economicshttp://en.wikipedia.org/wiki/Economies_of_scalehttp://en.wikipedia.org/wiki/Donald_Davishttp://en.wikipedia.org/wiki/BMWhttp://en.wikipedia.org/wiki/Ford_Motor_Companyhttp://en.wikipedia.org/wiki/Budweiser_(Anheuser-Busch)http://en.wikipedia.org/wiki/Heinekenhttp://en.wikipedia.org/wiki/Grubel%E2%80%93Lloyd_indexhttp://en.wikipedia.org/w/index.php?title=Balassa_index&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Balassa_index&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Aquino_index&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Bergstrand_index&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Glesjer_index&action=edit&redlink=1http://en.wikipedia.org/wiki/Paul_Krugmanhttp://en.wikipedia.org/wiki/Neoclassical_economicshttp://en.wikipedia.org/wiki/Economies_of_scalehttp://en.wikipedia.org/wiki/Donald_Davishttp://en.wikipedia.org/wiki/BMWhttp://en.wikipedia.org/wiki/Ford_Motor_Companyhttp://en.wikipedia.org/wiki/Budweiser_(Anheuser-Busch)http://en.wikipedia.org/wiki/Heinekenhttp://en.wikipedia.org/wiki/Grubel%E2%80%93Lloyd_indexhttp://en.wikipedia.org/w/index.php?title=Balassa_index&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Balassa_index&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Aquino_index&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Bergstrand_index&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Glesjer_index&action=edit&redlink=1