Post-Heckscher-Ohlin Theories of Trade and Intra - Industry Trade

Post–Heckscher-
Ohlin Theories of
Trade and Intra-
Industry Trade
10-1
IMPERFECT COMPETITION AND
INTERNATIONAL TRADE- Trade Based On
Product Differentiation
• The H-O theory leaves a significant portion of today’s
international trade unexplained.
• A large portion of the output of modern economies today
involves differentiated rather than homogeneous products.
• As a result, a great deal of international trade involve the

exchange of differentiated products of the same industry or
broad product group.
• That is, a great deal of international trade is intra-industry
trade in differentiated products, as opposed to inter-industry
trade in completely different products
10-2
Intra industry trade
• Intra industry trade refers to the simultaneous exporting and importing of

products that belong to the same industry.
• The nation then imports other varieties and styles from other nations.
• Intra-industry trade benefits consumers because of the wider range of choices

(i.e., the greater variety of differentiated products) available at the lower prices
made possible by economies of scale in production.
10-3
Possible sources of IIT
• Transport costs and geographical location:
 In a physically large country, transport costs for a product may play a
role in causing intra-industry trade, especially if the product has large
bulk relative to its value.
 For many products, shipping costs are high in relation to their market
value. The examples include heavy and inexpensive goods, such as
cement, bricks and timber. High transport costs imply that markets
for such are limited geographically. It is quite possible that localized
markets exist across national borders, generating two-way trade.
 For example, it may well be that timber is exported from Mutare

(Zimbabwe) to Chimoi (Mozambique) and simultaneously exported
from Tete (Mozambique) to Mutoko (Zimbabwe). Two-way trade
associated with transport costs is common as different localized
binational market engage in ordinary commerce. In this sense, IIT
can be a result of political and geographic decisions on where to draw
national borders.
10-4
•Product Differentiation:
• Many varieties of a product exist because producers
attempt to distinguish their products in the minds of
consumers in order to achieve brand loyalty Or because
consumers themselves want a broad range of
characteristics in a product from which to choose.
•Degree of aggregation
• If the product category is broad (such as beverages and
tobacco), there will be greater intra-industry trade than
would be the case if a narrower category is examined
(such as beverages alone or, even more narrowly, wine
of fresh grapes).
10-5
• Differences in income distributions in countries:
• Even if two countries have similar per capita incomes,
differing distributions of total income in the two countries
can lead to IIT.
• Consider 2 countries, Country I has a heavy concentration of
households with lower incomes, while country II has a more
"normal" or less skewed distribution.
• Producers in country I will be concerned primarily with
satisfying the bulk of country I's population, so they will
produce a variety of the product that caters to consumers
with low incomes.
• Producers in country Il will cater to the bulk of country Il's
households, say, those households with high incomes.
•
10-6
 What about a household in country I with a high income?
And what about a household in country II with a low
income?
 These consumers will purchase the good from the
producers in the other country because their own home
firms are not producing a variety of the good that satisfies
these consumers.
 Hence, both countries have IIT in the product.
10-7
Measuring Intra-Industry Trade
• The level of intra-industry trade can be measured by the Grubel-Lloyd Index (T):
X M
T 1
X M
• where X and M represent, respectively, the value of exports and imports of a particular
industry or commodity group .
• The value of T ranges from 0 to 1. T = 0 when there is no IIT.
• On the other hand, if T = 1 (i.e.,there is only IIT or IIT is maximum,).
10-8

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Post–Heckscher-

• As a result, a great deal of international trade involve the

• Intra industry trade refers to the simultaneous exporting and importing of

• Intra-industry trade benefits consumers because of the wider range of choices

 For example, it may well be that timber is exported from Mutare

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