Chapter 5: Intra-

Industry Trade

An Introduction to International
Economics: New Perspectives on the
World Economy

© Kenneth A. Reinert,
Cambridge University Press 2021
Analytical Elements

 Countries
 Sectors
 Tasks
 Firms
 Factors

© Kenneth A. Reinert,
Cambridge University Press 2021
Table 5.1: Types of Trade

Type of Trade Phrase Meaning Source

Inter-industry Either/or Either imports or exports Comparative

in a given sector of the advantage
economy
Horizontal intra- Both/and/ Both imports and exports Product
industry same in a given sector of the differentiation
economy at the same
stage of processing.
Vertical intra- Both/and/ Both imports and exports Fragmentation
industry different in a given sector of the (comparative
economy at different advantage in
stages of processing. some instances)

© Kenneth A. Reinert,
Cambridge University Press 2021
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 eastern Asia
 Evidence suggests that western Asia (including Middle
East) and most of Africa participate very little in intra-
industry trade

© Kenneth A. Reinert,
Cambridge University Press 2021
Figure 5.1 The Evolution of Intra-Industry
Trade at the 5- and 3-Digit SITC Levels
(percent of total trade)

© Kenneth A. Reinert,
Cambridge University Press 2021
Intra-Industry Trade under
Monopolistic Competition
 “New trade theory”: modeling intra-industry
trade based on monopolistic competition
 Monopoly feature: firms face downward-sloping
demand curves as they produce differentiated
products
 Competition feature: firms have free entry and exit
from the sector in long run
 Increasing returns to scale/economies of scale

© Kenneth A. Reinert,
Cambridge University Press 2021
Figure 5.2 Economies of scale in the
monopolistic competition model
Cost side:

AC line is falling because of

economies of scale.

(note that these figures plot firm quantities, not sector quantities.)

© Kenneth A. Reinert,
Cambridge University Press 2021
Figure 5.3 Demand and marginal revenue in
the monopolistic competition model
Revenue side:

Demand curve is
relatively flat because of
a significant number of
close substitutes

Whenever the
firm increases its
output, the price
(p) falls

© Kenneth A. Reinert,
Cambridge University Press 2021
Figure 5.4 Autarky equilibrium in the
monopolistic competition model
Combining the cost and the revenue sides:

Long-term equilibrium of autarky

price and quantity

© Kenneth A. Reinert,
Cambridge University Press 2021
 Figure 5.5 The effects of international trade
in the monopolistic competition model
 The main effect of trade is to
expand the market in which
firms compete.
 Trade increases the price
elasticity of demand for any
individual firm.
 Consequently, the demand
curves becomes flatter.
Price
 The number of firms in the
falls sector is lower as a result of
trade, but the number of
available varieties is higher
as a result of trade, with more
varieties imported from
Quantity increases abroad.
© Kenneth A. Reinert,
Cambridge University Press 2021
Intra-Industry Trade under
Monopolistic Competition
 Product differentiation can lead to two-way trade
within a sector.
 Horizontal intra-industry trade: demand for final
products can come from both households and
firms.
 Vertical intra-industry trade: demand for
intermediate products only from firms
 Gains from trade:
 Standard gains from trade reflecting lower prices
 Households have access to a variety of goods
© Kenneth A. Reinert,
Cambridge University Press 2021
The Smooth Adjustment
Hypothesis
 The increasing extent of intra-industry trade in world
trading system has some important implications for the
adjustment of 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 process—often gives rise to calls for
protection

© Kenneth A. Reinert,
Cambridge University Press 2021
The Smooth Adjustment
Hypothesis
 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)

© Kenneth A. Reinert,
Cambridge University Press 2021
Appendix 5.1: The Grubel–
Lloyd Index
 The Grubel-Lloyd index looks at a given
product category denoted by letter i
 It is calculated as:  Ei  Z i 
Bi 1   100
 Ei  Z i 
 This index is illustrated in Figure 5.6
 Pure inter-industry trade is along the axes
 Pure intra-industry trade is along the 45-degree
diagonal

© Kenneth A. Reinert,
Cambridge University Press 2021
Figure 5.6: Visualizing the Grubel-
Lloyd Index

© Kenneth A. Reinert,
Cambridge University Press 2021
The Grubel-Lloyd Index for
China
 The Grubel-Lloyd Index for China is
presented in Table 5.2
 Note as we disaggregate further (moving
from right to left), the amount of intra-industry
trade declines but does not disappear
 Note that the amount of intra-industry trade
increases over time

© Kenneth A. Reinert,
Cambridge University Press 2021
Table 5.2: Measuring China’s Intra-Industry
Trade Using the Grubel-Lloyd Index.
Source: Van Marrewijk (2009)
Year 3-digit SITC or 2-digit SITC or 1-digit SITC or
237 Sectors 237 Sectors 10 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

© Kenneth A. Reinert,
Cambridge University Press 2021