Reinert Intra Industry

7/31/2019 Reinert Intra Industry

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Chapter 4: Intra-Industry

Trade

An Introduction to International

Economics: New Perspectives on theWorld Economy

Kenneth A. Reinert, Cambridge UniversityPress 2012


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Analytical Elements

Countries

Sectors

Tasks

Firms

Factors



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Table 4.1: Types of Trade

Type of Trade Phrase Meaning Source

Inter-industry Either/or Eitherimports or exports

in a given sector of the

economy

Comparative

advantage

Horizontal intra-

industry

Both/and/

same

Bothimports andexports

in a given sector of the

economy at the same

stage of processing.

Product

differentiation

Vertical intra-

industry

Both/and/

different

Bothimports andexports

in a given sector of theeconomy at different

stages of processing.

Fragmentation

(comparativeadvantage in

some instances)

A. Reinert, CambridgKenneth e UniversityPress 2012


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Figure 4.1 The Evolution of Intra-Industry Trade at the 5-

and 3-Digit SITC Levels (percent of total trade)



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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



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The increasing extent of intra-industry trade in world

trading system has some important implications for the

adjustmentof 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 processoften gives rise to calls for

protection



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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)



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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



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Figure 4.2: Markets for Blue and Food-

Service Cheese



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Figure 4.3: U.S. Intra-Industry Trade in

Cheese



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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



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Figure 4.4: The Gains from Intra-

Industry Trade



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Grubel-Lloyd Index

The Grubel-Lloyd index looks at a given

product category denoted by letteri

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

ii

iZE

ZE

B


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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-industrytrade declines but does not disappear

Note that the amount of intra-industry trade

increases over time



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Table 4.2: Measuring Chinas Intra-Industry Trade Using

the Grubel-Lloyd Index. Source: Van Marrewijk (2009)

Year 3-digit SITC or237 Sectors

2-digit SITC or237 Sectors

1-digit SITC or10 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


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