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Chapter 4: Intra-Industry Trade
An Introduction to International Economics: New Perspectives on the World Economy
© Kenneth A. Reinert, Cambridge University Press 2012
© Kenneth A. Reinert, Cambridge University Press 2012
Analytical Elements
Countries Sectors Tasks Firms Factors
© Kenneth A. Reinert, Cambridge University Press 2012
Table 4.1: Types of Trade
Type of Trade Phrase Meaning Source
Inter-industry Either/or Either imports or exports in a given sector of the economy
Comparative advantage
Horizontal intra-industry
Both/and/same
Both imports and exports in a given sector of the economy at the same stage of processing.
Product differentiation
Vertical intra-industry
Both/and/different
Both imports and exports in a given sector of the economy at different stages of processing.
Fragmentation (comparative advantage in some instances)
© Kenneth A. Reinert, Cambridge University Press 2012
Figure 4.1 The Evolution of Intra-Industry Trade at the 5- and 3-Digit SITC Levels (percent of total trade)
© Kenneth A. Reinert, Cambridge University Press 2012
Global Patterns of Intra-Industry Trade Approximately one third of world trade takes place as
intra-industry trade Especially prominent in manufactured goods among the
developed or high-income countries of the world Probably accounts for up to 70% of trade
Globally, intra-industry trade is becoming more important over time, particularly in Asia
© Kenneth A. Reinert, Cambridge University Press 2012
Global Patterns of Intra-Industry Trade The increasing extent of intra-industry trade in world
trading system has some important implications for the adjustment of economies to increasing trade
Increases in inter-industry trade based on absolute or comparative advantage involve import sectors contracting and export sectors expanding Requires that productive resources, most notably workers, shift
from contracting to expanding sectors in order to avoid unemployment
Not always an easy process—often gives rise to calls for protection
© Kenneth A. Reinert, Cambridge University Press 2012
Global Patterns of Intra-Industry Trade The adjustment process in the case of intra-industry
trade is very different A given sector experiences increases in imports and exports
simultaneously Workers are less likely to need to shift between sectors Demands for protection from increased imports are less likely
This is known as the “smooth adjustment hypothesis” Smoothness:
Inter-industry trade: Low (not at all smooth) Vertical intra-industry trade: Medium (somewhat smooth) Horizontal intra-industry trade: High (smooth)
© Kenneth A. Reinert, Cambridge University Press 2012
An Explanation of Intra-Industry Trade Will develop an explanation of intra-industry
trade using the example of US trade in cheese Have to allow for product differentiation among types
of cheese Will restrict ourselves to two types of cheese: blue
cheese (denoted by B) and food-service cheese (denoted by F)
This situation is represented in Figure 4.2 Trade implications of these supply and demand
relationships are illustrated in Figure 4.3
© Kenneth A. Reinert, Cambridge University Press 2012
Figure 4.2: Markets for Blue and Food-Service Cheese
© Kenneth A. Reinert, Cambridge University Press 2012
Figure 4.3: U.S. Intra-Industry Trade in Cheese
© Kenneth A. Reinert, Cambridge University Press 2012
Gains from Intra-Industry Trade Does intra-industry trade in cheese benefit
the United States, or is it unnecessary and wasteful?
Take up this issue in Figure 4.4 Areas B and D represent gains from trade
© Kenneth A. Reinert, Cambridge University Press 2012
Figure 4.4: The Gains from Intra-Industry Trade
© Kenneth A. Reinert, Cambridge University Press 2012
Grubel-Lloyd Index
The Grubel-Lloyd index looks at a given product category denoted by letter i
It is calculated as:
This index is illustrated in Figure 4.5 Pure inter-industry trade is along the axes Pure intra-industry trade is along the 45 degree
diagonal
1001
ii
iii ZE
ZEB
© Kenneth A. Reinert, Cambridge University Press 2012
Figure 4.5: Visualizing the Grubel-Lloyd Index
© Kenneth A. Reinert, Cambridge University Press 2012
The Grubel-Lloyd Index for China The Grubel-Lloyd Index for China is
presented in Table 4.2 Note as we disaggregate further (moving
from right to left), the amount of intra-industry trade declines but does not disappear
Note that the amount of intra-industry trade increases over time
© Kenneth A. Reinert, Cambridge University Press 2012
Table 4.2: Measuring China’s Intra-Industry Trade Using the Grubel-Lloyd Index. Source: Van Marrewijk (2009)Year 3-digit SITC or
237 Sectors2-digit SITC or 237 Sectors
1-digit SITC or 10 Sectors
1980 20 30 63
1985 20 29 44
1990 36 45 60
1995 38 48 67
2000 39 48 57
2005 42 49 58