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

when the net trade-gross trade ratio is characterized by opposite trade imbalances for the sub-groups Notes
(Greenaway and Milner, 1983). Suppose there are two commodities/sub-groups within an industry:
+
X i − M i (X 1i − M 1i ) (X 2i − M 2i )
(X i + M ) i = (X 1i + X 2i + M 1i + M 2i ) ... (5)
If the country in question is a net exporter (importer) in both sub-groups the weighting effect of the
ratio is maintained, but if the country is a net exporter of one good and a net importer of the other
good, the weighting effect is lost and the Grubel-Lloyd Index will take on a different value (Greenaway
and Milner, 1983). This can be seen in the following table :
Table 2 : Trade imbalance bias in the GL Index

Category X M |X – M | (X + M ) GL Index
i i i i i i
3-Digit 180 310 130 490 0.735
Sub-Group 5-Digit 80 160 80 240 0.667
Sub-Group 5-Digit 100 150 50 250 0.800
3-Digit 230 260 30 490 0.939
Sub-Group 5-Digit 80 160 80 240 0.667
Sub-Group 5-Digit 150 100 50 250 0.800
In the first category the country is a net importer in both sub-groups, but in the second category the
country is a net importer in one good and a net exporter in the other. Since the Grubel-Lloyd Index
does not recognize the direction of trade, the sub-group Grubel-Lloyd Indices are the same in both
cases, but when the sub-groups are aggregated the Grubel-Lloyd Index for the second category is
biased upward.
The index can be corrected by replacing the original net trade-gross trade ratio with the following net
trade-gross trade ratio :
∑ n i=1 X ij − M ij
( X j + M ) j ... (6)
where i ≡ sub-group i within industry j. This adjustment removes the trade imbalance bias that results
from countries being a net exporter in one sub-group of an industry and a net importer in another
sub-group as well as the simple aggregation bias. We are left with the following index of intra-
industry trade :
∑ n X ij − M ij
GL' j = 1 − i=1 ... (7)
( X j + M ) j

Generally speaking, if a country is a net exporter/importer in both goods, GL = GL’, but if a country
is a net exporter in one good and a net importer in another, GL > GL’ : ≤0 GL' ≤ GL ≤ 1 (Greenaway
and Milner, 1983). There was another adjustment suggested to the Grubel-Lloyd Index by Aquino
(1978) in response to an imbalance in overall trade. Greenaway and Milner (1981) subsequently showed
that the suggested adjustment is more likely to induce, rather than remove, distortions in the Grubel-
Lloyd Index. Not surprisingly, this Aquino adjustment has fallen out of favour.
7.5 Measuring Marginal Intra-Industry Trade

Despite the ability to calculate the Grubel-Lloyd Index over time, it does not have desirable dynamic
properties. An increase or decrease in the Grubel-Lloyd Index is not necessarily associated with
corresponding increases or decreases in intra-industry trade. Caves (1981) and Hamilton and Kniest
(1991) have noted that an equal/proportional increase in the exports and imports within an industry

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