Page 95 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH

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

Notes
UV X < 1/ (1 α+ UV X >+
UV M ) or UV M 1 α :

∈ ∑ VD
∑ p i j ( X p,t + M p,t )
TWVD = ... (21)
j ∑ p i j ( X p,t + M p,t )
∈ ∑ Z
where TWVD ≡ two-way horizontally differentiated trade share, VD ≡ horizontally differentiated
j
p
trade, Z ≡ all trade types, i ∈ j ≡ product i in industry j, and t ≡ year. And of course, the share of
one-way trade in industry j would be calculated as follows :
OWT = 1 – TWHD – TWVD ... (22)
j j j
where OWT ≡ one-way trade share.
j
Subsequent empirical work on the determinants of intra-industry trade by Greenaway, Hine, and
Milner (1994, 1995) and Greenaway, Milner, and Elliott (1999) have used the initial threshold measure
of product quality initiated by Abd-el-Rahman (1991) and a trade overlap value ofγ = 0 percent,
while Fontagnè, Freudenberg, and Pèridy (1997) have used the alternative threshold measure of
product quality provided by Fontagnè, and Freudenberg (1997) and a trade overlap value of γ = 10
percent.
The Determinants of Intra-Industry Trade
In the previous section we discussed a number of ways that intra-industry trade has been measured.
Though there may be some difficulties and issues with the measurement of intra-industry trade there
has been a general consensus in the literature of what to measure. The same cannot be said for the
determinants of intra-industry trade.
Since the first models of intra-industry trade, a great diversity of models in both horizontal and
vertical intra-industry trade as well as alternative market structures such as monopolistic competition
and oligopoly have come to pass. Some of these models have differing determinants/predictions
while others have determinants that would prove difficult to discriminate between. Despite these
difficulties, a multitude of empirical studies have sought to identify characteristics that are common
to all, or most, of these models. These characteristics, of course, are subject to measurement error and
are in large part proxy variables, which makes some of the measurement issues above seem
insignificant. These characteristics have bee broadly classified as country-specific and industry specific
determinants (Greenaway and Milner, 1989).
7.7 Intra-Industry Trade Theory and Developing Economics

As we have seen from our previous discussions that the first generation models in this new literature
have been shown to be applicable for explaining trade between countries at similar levels of per
capita income or development viz., North-North trade. Krugman argues that this exclusion of "poor
nations" is due to "a bias in the research agenda". The trade analysis of LDCs requires taking account
of increasing returns and imperfect competition. The "new theory' is essentially based on "arbitrary"
specialization to realize economies of scale. The specific characteristics of LDCs require a different
emphasis for adopting the theories to the developing world. Certain features of Southern economies
are of relevance that bears on appropriate choice of models of trade. One pertinent point to note is
that most of the theories are applicable to manufactures trade not the 'climatic' primary products. It is
widely recognized that the simple H-O. theory is capable of explaining N-S trade in terms of the
differences in factor endowment and mutual gains from this exchange are assured. The preference
similarity theory, for example, is primarily applicable to N-N trade with tastes being determined by
income level. The South having substantially lower income levels, on average, and having different
tastes from the North would not participate in this form of trade. Marked income inequalities among
the South economies imply that having skewed income distribution, the rich in these economies have
incomes and hence, tastes similar to those in the North. South could gain from preference-similarity

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