Intra-industry trade: measurements, determinants and growth : a study of Swedish foreign trade

Abstract: The conclusions are that a traditional factor proportions model seems neither theoretically nor empirically to explaing IIT. However, a relaxation of the assumption of homogeneous products in an industry gives rise to several implications for IIT. Industry characteristics such as an industry’s factor intensity and the degree of product differentiation play important roles. The more extreme an industry is with regard to factor intensity, i.e., if an industry is very capital or very labor intensive, the smaller IIT is in that industry. The more differentiated the products, the less the elasticity of substitution in demand between different products in an industry, the larger the IIT. In order to test the latter, a new measure of product differentiation closely related to the concept in the theoretical model is developed. Furthermore, similarity in relative factor endowments in the trading countries and transaction costs - tariffs and transport costs - influence IIT. The more similar the relative factor endowments, the larger the IIT. The less the transaction costs, the greater the IIT.