Intra-industry trade refers to the exchange of similar products belonging to the same industry. The term is usually applied to international trade, where the same types of goods or services are both imported and exported.
Examples of this kind of trade include automobiles, foodstuffs and beverages, computers and minerals.
Europe exported 2.6 million motor vehicles in 2002, and imported 2.2 million of them. Japan exported 4.7 million vehicles in 2002 (1 million of which went to Europe, and 2 million to North America), and imported 0.3 million.
Why do countries at the same time import and export the products of the same industry, or import and export the same kinds of goods?
According to Nigel Grimwade, "An explanation cannot be found within the framework of classical or neo-classical trade theory. The latter predicts only inter-industry specialisation and trade". [1] However, this is far from the case.
The traditional model of trade were set out by the model of David Ricardo and the Heckscher–Ohlin model, which tried to explain the occurrence of international trade. Both models used the idea of comparative advantage and an explanation of why countries trade. However, many economists have made the point of claiming that these models provide no explanation towards intra-industry trade as under their assumptions countries with identical factor endowments would not trade and produce goods domestically. [2] Hence, as intra-industry trade has developed many economists have looked at other explanations.
One attempt to explain IIT was made by Finger (1975), who thought that occurrence of intra-industry trade was “unremarkable” as existing classifications place goods of heterogeneous factor endowments in a single industry. However, evidence shows that even when industries are disaggregated to extremely fine levels IIT still occurs, so this argument can be ignored.
Another potential explanation is provided by Flavey & Kierzkowski (1987). They produced a model that tried to get rid of the idea that all products are produced under identical technical conditions. Their model showed that on the demand side goods are distinguished by the perceived quality of that good and high quality goods are produced under conditions of high capital intensity. However, this explanation has also been dismissed. [3] It is questioned whether the model applies to IIT at all, as it does not address directly trade between goods of similar factor endowments.
The most comprehensive and widely accepted explanation, at least within economic theory, is that of Paul Krugman's New Trade Theory. Krugman argues that economies specialise to take advantage of increasing returns, not following differences in regional endowments (as contended by neoclassical theory). In particular, trade allows countries to specialize in a limited variety of production and thus reap the advantages of increasing returns (i.e., economies of scale), but without reducing the variety of goods available for consumption.
Yet, Donald Davis believed that both the Heckscher–Ohlin and Ricardian models were still relevant in explaining intra-industry trade. [4] He developed the Heckscher-Ohlin-Ricardo model, which showed that even with constant returns to scale that intra-industry trade could still occur under the traditional setting. The Heckscher-Ohlin-Ricardo model explained that countries of identical factor endowments would still trade due to differences in technology, as this would encourage specialisation and therefore trade, in exactly the same matter that was set out in the Ricardian model.
There are three types of intra-industry trade
Although the theory and measurement of intra-industry trade initially focused on trade in goods, especially industrial products, it has also been observed that there is substantial intra-industry trade in the international trade of services. [5]
Intra-industry trade is difficult to measure statistically because regarding products or industries as "the same" is partly a matter of definition and classification.
For a very simple example, it could be argued that although a BMW and a Ford are both motor cars, and although a Budweiser and a Heineken are both beers, they are really all different products.
Various indexes of IIT have been created, including the Grubel–Lloyd index, the Balassa index, the Aquino index, the Bergstrand index and the Glesjer index. Research suggests that
"Intra-industry trade has been considered in international trade literature as the explanation of the unexpectedly large expansion of industrial trade among OECD countries, for which it represented more than two-thirds of their total international trade by the beginning of the seventies." [6]
David Ricardo was a British political economist. He was one of the most influential of the classical economists along with Thomas Malthus, Adam Smith and James Mill. Ricardo was also a politician, and a member of the Parliament of Great Britain and Ireland.
In an economic model, agents have a comparative advantage over others in producing a particular good if they can produce that good at a lower relative opportunity cost or autarky price, i.e. at a lower relative marginal cost prior to trade. Comparative advantage describes the economic reality of the work gains from trade for individuals, firms, or nations, which arise from differences in their factor endowments or technological progress.
Bertil Gotthard Ohlin was a Swedish economist and politician. He was a professor of economics at the Stockholm School of Economics from 1929 to 1965. He was also leader of the People's Party, a social-liberal party which at the time was the largest party in opposition to the governing Social Democratic Party, from 1944 to 1967. He served briefly as Minister of Commerce and Industry from 1944 to 1945 in the Swedish coalition government during World War II. He was President of the Nordic Council in 1959 and 1964.
In economics, internationalization or internationalisation is the process of increasing involvement of enterprises in international markets, although there is no agreed definition of internationalization. Internationalization is a crucial strategy not only for companies that seek horizontal integration globally but also for countries that addresses the sustainability of its development in different manufacturing as well as service sectors especially in higher education which is a very important context that needs internationalization to bridge the gap between different cultures and countries. There are several internationalization theories which try to explain why there are international activities.
The Stolper–Samuelson theorem is a basic theorem in Heckscher–Ohlin trade theory. It describes the relationship between relative prices of output and relative factor rewards—specifically, real wages and real returns to capital.
Eli Filip Heckscher was a Swedish political economist and economic historian.
In economics, the principle of absolute advantage is the ability of a party to produce a good or service more efficiently than its competitors. The Scottish economist Adam Smith first described the principle of absolute advantage in the context of international trade in 1776, using labor as the only input. Since absolute advantage is determined by a simple comparison of labor productiveness, it is possible for a party to have no absolute advantage in anything.
The Rybczynski theorem was developed in 1955 by the Polish-born English economist Tadeusz Rybczynski (1923–1998). It states that at constant relative goods prices, a rise in the endowment of one factor will lead to a more than proportional expansion of the output in the sector which uses that factor intensively, and an absolute decline of the output of the other good.
The Heckscher–Ohlin model is a general equilibrium mathematical model of international trade, developed by Eli Heckscher and Bertil Ohlin at the Stockholm School of Economics. It builds on David Ricardo's theory of comparative advantage by predicting patterns of commerce and production based on the factor endowments of a trading region. The model essentially says that countries export the products which use their relatively abundant and cheap factors of production, and import the products which use the countries' relatively scarce factors.
International economics is concerned with the effects upon economic activity from international differences in productive resources and consumer preferences and the international institutions that affect them. It seeks to explain the patterns and consequences of transactions and interactions between the inhabitants of different countries, including trade, investment and transaction.
New trade theory (NTT) is a collection of economic models in international trade theory which focuses on the role of increasing returns to scale and network effects, which were originally developed in the late 1970s and early 1980s. The main motivation for the development of NTT was that, contrary to what traditional trade models would suggest, the majority of the world trade takes place between countries that are similar in terms of development, structure, and factor endowments.
Leontief's paradox in economics is that a country with a higher capital per worker has a lower capital/labor ratio in exports than in imports.
The Heckscher–Ohlin theorem is one of the four critical theorems of the Heckscher–Ohlin model, developed by Swedish economist Eli Heckscher and Bertil Ohlin. In the two-factor case, it states: "A capital-abundant country will export the capital-intensive good, while the labor-abundant country will export the labor-intensive good."
The Linder hypothesis is an economics conjecture about international trade patterns: The more similar the demand structures of countries, the more they will trade with one another. Further, international trade will still occur between two countries having identical preferences and factor endowments.
The gravity model of international trade in international economics is a model that, in its traditional form, predicts bilateral trade flows based on the economic sizes and distance between two units. Research shows that there is "overwhelming evidence that trade tends to fall with distance."
In economics, the Metzler paradox is the theoretical possibility that the imposition of a tariff on imports may reduce the relative internal price of that good. It was proposed by Lloyd Metzler in 1949 upon examination of tariffs within the Heckscher–Ohlin model. The paradox has roughly the same status as immiserizing growth and a transfer that makes the recipient worse off.
Technology Gap Theory is a model developed by M.V. Posner in 1961, which describes an advantage enjoyed by the country that introduces new goods in a market. The country will enjoy a comparative advantage as well as a temporary state of monopoly until other countries have achieved the ability to imitate the new good. Unlike the past theories which assume the market to be fixed and given, such as the Heckscher-Ohlin theory, the technology gap model addresses the technological changes. It suggests a state of economy influenced by science, politics, markets, culture and most importantly, uncertainty, which threatens the mainstream neoclassical economists as they explain economic outcomes mainly based on the natural endowment scarcity. The theory is backed up by the ideas of Joseph Schumpeter. As a result, the technology gap theory is often rejected by neoclassical economists.
The home market effect is a hypothesized concentration of certain industries in large markets. The home market effect became part of New Trade Theory. Through trade theory, the home market effect is derived from models with returns to scale and transportation costs. When it is cheaper for an industry to operate in a single country because of returns to scale, an industry will base itself in the country where most of its products are consumed in order to minimize transportation costs. The home market effect implies a link between market size and exports that is not accounted for in trade models based solely on comparative advantage.
International trade theory is a sub-field of economics which analyzes the patterns of international trade, its origins, and its welfare implications. International trade policy has been highly controversial since the 18th century. International trade theory and economics itself have developed as means to evaluate the effects of trade policies.
The Ricardo–Viner model, also known as the specific factors model, is an extension of the Ricardo model used in international trade theory. It was due to Jacob Viner's interest in explaining the migration of workers from the rural to urban areas after the Industrial revolution. Unlike the Ricardian model, the specific factors model allows for the existence of factors of production besides labor. In other words, labor is mobile, while the two other factors of production are immobile as opposed to the Ricardian model where labor is immobile internationally, but mobile between two sectors of an economy.
