Page 91 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH

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

where n is the number of years between the two years of measurement. This index of marginal intra- Notes
industry trade captures the proportion of the increase in exports (imports) within an industry with a
corresponding increase in imports (exports) within that same industry. Since this index will only
measure new trade flows, by definition, it captures the relative importance of intra-industry trade
generated by trade liberalization. As with the Grubel-Lloyd Index, the Marginal Intra-Industry Trade
Index takes on values between 0 and 1, with 1 representing new trade that is pure intra-industry
trade (Hamilton and Kniest, 1991).
We now have a representation of the dynamic nature of inter- and intra-industry trade for the purpose
of evaluating adjustment costs over some time period. However, as with most first attempts, this
index has complications. Greenaway, Hine, Milner and Elliott (1994) state that this index of marginal
intra-industry trade that is undefined whenever ∆X or ∆M is negative ignores precisely what it is
trying to measure. Using United Kingdom trade data, they find that no less than 32 percent of all 5-
digit SITC categories are undefined by this index. Also, this measure indicates the importance of new
intra-industry trade without any reference to the amount of new trade—a high index value may not
be meaningful. There is also a problem of inflation causing an upward bias in this measure if the
same quantity of exports (imports) now commands an inflated price. This will give the appearance of
increased intra-industry trade that was really a nominal phenomenon; using real-valued trade data
easily corrects for this bias (Greenaway et al., 1994).
Greenaway et al. (1994) propose the following index, which differs from the Hamilton and Kniest
(1991) index by representing intra-industry trade in values, rather than as a ratio :
M I I T’ = [(X + M) – |X – M|] – [(X + M) – |X – M|] ... (10)
t t – n
= ∆ [(X + M) – |X – M|]. ... (11)

As a consequence, this ratio is always defined and can easily be related to levels of new trade in order
to assess the significance of this new trade. However, this measure suffers from the same trade
imbalance bias discussed with the Grubel-Lloyd Index above, which was precisely the criticism held
by Hamilton and Kniest (1991).
&&lhart (1994) suggests an index of marginal intra-industry trade that is always defined and does
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not suffer from the trade imbalance bias of previous indices :
(X t − X − t n ) (M t − M − t n ) ∆X − ∆M
−
M I I T’’ = 1 − = 1 − . ... (12)
X t − X − t n + M t − M − t n ∆X + ∆M

As with previous indices, this index takes on values between 0 and 1, with 1 representing pure
marginal intra-industry trade. Like the Hamilton and Kniest Index, this index of marginal intra-
industry trade captures the nature of the change in export and import flows, which is the desired
property of such an index. In order to ensure this index is of economic significance, one only needs to
take reference to the absolute (real) value of new trade.
&&lhart (1994) has also suggested an index of marginal intra-industry trade to capture industry
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performance; this index will allow for an investigation into the distribution of trade-induced gains
(losses) between countries :
∆X − ∆M
M I I T’’ = ∆X + ∆M . ... (13)

Unlike previous Grubel-Lloyd type indices, this index of marginal intra-industry trade ranges between
–1 and 1. The closer M I I T’” is to zero, the higher is marginal intra-industry trade, whereas values

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