Demand patterns and vertical intra-industry trade with special reference to North-South trade

Abstract

Demand patterns have been considered important driving forces of intra-industry trade (IIT) ever since the emergence of IIT literature. The distribution of income within countries and per capita income differences between countries are regarded as major explanatory factors behind vertical IIT. This paper focuses on North-South trade, and we are particularly interested in the role of income distribution and per capita income as demand-side determinants of vertical IIT. We test hypotheses on differences in income distribution, differences in per capita income, and average market size in two different empirical approaches; an economy-wide, and a multi-industry approach. The results show evidence of the role of income distribution and per capita income, that there is an important interaction between these two variables, and that the average market size matters.