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Unit 7 : Causes of Emergence and Measurement of Intra-Industry Trade and Its Impact on Developing Economics

appropriate product dimension. Consequently, IIT indices may be expected to be lower and more Notes
stable where the goods are vertically differentiated rather than horizontally. Furthermore, it can be
inferred from our findings that as industrialization led growth and development in the developing
economies proceeds, pushing these countries along the development path towards the matured
industrial country stage, intra-industry specialization in production and trade in certain manufacturing
commodities will play an increasingly important role in manufacturing production and trade.

7.3 Measurement of Intra-Industry Trade

Empirical work on the measurement of intra-industry trade began in the mid-1960s with Balassa
(1966) and the most well known work on intra-industry trade by Grubel and Lloyd (1975). These
works were then followed by, what we know as today as, the theory of intra-industry trade. These
models of intra-industry trade developed on the heels of the work on monopolistic competition and
product differentiation by Dixit and Stiglitz (1977). They began with the work of Krugman (1979,
1980, 1981), Lancaster (1980), and Helpman (1981) who developed models of horizontally differentiated
intra-industry trade with monopolistic competition—these models, and their derivatives, are
summarized in Helpman and Krugman (1985). Models of horizontally differentiated intra-industry
trade under oligopolistic competition, of the form of Eaton and Kierzkowski (1984), followed shortly
after. Vertically differentiated intra-industry trade with perfect competition has been modelled by
Caves (1981) using a version of the classical Heckscher-Ohlin international trade model as well as
oligopolistic models of vertically differentiated intra-industry trade, such as Shaked and Sutton (1984).
Empirical investigations of these models are omnipresent. They cover issues dealing with the
measurement of intra-industry trade and the estimation of its determinants based on the models
named above. Generally focussing on determinants most of the models have in common, these studies
investigate intra-industry trade between and within both developed and developing countries. This
paper brings together the various measures and econometric studies on intra-industry trade into one
place. A complete review of the literature is well beyond the scope of this paper, but it highlights the
general trends and common features in measurement and econometric studies, as well as the
advancements that have taken place over the development of this literature.
Measuring Intra-industry Trade
The purpose of this section is to discuss the methodological aspects of the measurement of intra-
industry trade, rather than a documentary study of intra-industry trade applied to a country, or
group of countries. Most of the references in this section, as well as the section below on the
determinants of intra-industry trade, contain documentation of intra-industry trade levels for the
countries under study that are too numerous to mention here in this review.
Usually, intra-industry trade is defined as the simultaneous export and import of goods in the same
industry. But before we can discuss any measurement of intra-industry trade, we must decide what
we are to measure. This is not a philosophical question, but a practical one as the history of empirical
intra-industry trade has been mired by allegations of being a “statistical phenomenon” (Lipsey, 1976).
The charge of being a statistical phenomenon is not an idle one. At the 3-digit SITC level of aggregation,
canoes and 200,000 tonne tankers are in the same “ships and boats” industry; at the same level of
aggregation, table model radios and airport flight control equipment are in the “telecommunications
apparatus” industry (Lipsey, 1976). Also, Finger (1975) notes that trade overlap is not inconsistent
with classical trade theory if empirical product groups do not correspond with the appropriate factor
proportions groupings.
Industry/product categories have become sufficiently disaggregated to disregard these early claims
of intra-industry trade being a statistical phenomenon. The Harmonized Tariff Schedule (HTS) has a
10-digit classification system with over 20,000 entries that not only separate canoes from 200,000
tonne tankers, but also from any other boat not designed to be used with motors or sails—a classification
that is even distinct from a rowboat. However, aggregation should not be forgotten since it may still
be an issue for other reasons. Nevertheless, we will now move on to the various measures.

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