David K.H. Begg, Gianluigi Vernasca-Economics-McGraw Hill Higher Education (2011)

28.3 Intra-industry trade
Figure 28.1
averages)
4
3
2
l
0
-1
-2
-3
-4
-5
- I
I 1
1
I
I
I
• • •
I
I
I
\) East Asia and the Pacific
0 Industrial market economies
+ Latin America and the Caribbean
0 South Asia
0 Sub-Saharan Africa
-? +--
0 2 3 4
Abundant land;
less skilled
workers
5 6 8 9 10 11 12
Scarce land;
more skilled
workers
Comparative advantage and export composition ( 125 countries and regional
Source : World Bank, World Development Report, 1995.
1ṉ t_ra_-_in_du_s_tr_yt_ra_d_e
-
Different countries have a comparative advantage in different goods and specialize
in producing these goods for the world economy. This explains why the UK exports
cars to China but imports textiles from China. It does not explain why the UK
exports cars (Jaguar, Aston Martin, Mini) to Germany while simultaneously
importing cars (Mercedes, BMW, VW) from Germany.
Intra-industry trade is
two-way trade in goods made
within the same industry.
A Jaguar is not exactly the same commodity as a Mercedes, nor is Carlsberg exactly the same as Stella. Cars
and beer are industries each making a range of different, but highly substitutable, products which enjoy
brand allegiance.
Intra-industry trade reflects three factors. First, consumers like a wide choice of brands. They do not want
exactly the same car as everyone else. Second, there are important economies of scale. Instead of each
country making small quantities of each brand in each industry, it makes sense for the UK to make Jaguars,
Germany to make Mercedes and Sweden to make Volvos and then to swap them around in international
trade. Third, the tendency to specialize in a particular brand, to which the demand for diversity and the
possibility of scale economies give rise, is limited by transport costs. Intra-industry trade between Germany
and France is larger than intra-industry trade between Germany and Japan.
To measure the importance of intra-industry trade, we define an index as zero when trade in a particular
commodity is entirely one-way: a country either exports or imports the good, but not both.
At the opposite extreme, the index equals 1 when there is a complete two-way trade in a commodity: a
country imports as much of the commodity as it exports. Figure 28.2 shows the index for trade by a typical
developed economy.
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