Splitting and Measuring Intra-Industry Trade

University dissertation from Department of Economics, P.O. Box 7082, S-220 07 LUND, Sweden

Abstract: This thesis aims at shedding light on three important issues related to intra-industry trade (IIT); the relevance of demand patterns, horizontal versus vertical IIT, and the measurement of IIT. Chapter two analyses IIT between high and low-income countries, and uses a theoretical model that explains the exchange of similar products of different qualities. We are particularly interested in the role of income distribution and average per capita income as demand-side determinants of vertical IIT, and test hypotheses on the role of differences in income distribution, differences in per capita income and average market size in three different empirical approaches; an economy-wide, a multi-industry, and a sector level approach. The results show evidence of the role of income distribution and per capita income, and that there is an important interaction between these two variables. Given a distinct production-pattern specialisation of quality levels between high and low-income countries, the share of vertical IIT increases as the income distribution becomes more equal (unequal) in the former (latter) country as long as the difference in average per capita income is not too large to exclude any overlap in demand. Finally, we find that the support for the Linder-hypothesis depends on the income pattern within trade partners; the larger the share of total income that is diverted towards income groups that demand quality varieties produced by partner countries, the more likely is the validity of the Linder-hypothesis. Chapter three integrates horizontal and vertical IIT within a single theoretical framework, which implies that we can use an alternative approach, i.e. draw hypotheses about the share of horizontal IIT in total IIT, in order to test the opposite relationships that horizontal and vertical IIT have with important country-specific determinants. The econometric analysis supports the contradictory relationships. Similarities in factor proportions, especially human capital, and demand pattern, measured by per capita income levels and spatial closeness, are important determinants of the share of horizontal IIT in total IIT. Furthermore, market size matters and we found that the interaction between the average market size and the difference in market sizes is an important determinant of the share of horizontal IIT in total IIT. Chapter four discusses different ways of capturing the main features of the Chamberlin-Heckscher-Ohlin-Samuelson model in an empirical measure. Of particular interest are three interrelated refinements; the distinction between horizontal and vertical IIT, the adjustment of aggregation biases, and the definition of inter and intra-industry specialisation at product level. The findings of this chapter underscore the findings of chapter three since our empirical specification of the model has the largest explanatory power when we focus on two-way flows in products defined as horizontally differentiated. Moreover, we find support for our concern about a weaker linkage between the share of IIT and factor endowment differences as long as we neglect trade overlaps within narrowly defined product groups. An additional finding of this study is a non-linear relationship between economies of scale and intra-industry trade that may explain unclear and sometimes contradictory results in the literature.

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