Intra-industry Trade

Abstract

Abstract A large share of world trade consists of intra-industry trade. This type of trade takes place when traders both import and export goods that have similar characteristics. Wine producing regions import wines produced from the same varieties grown in competing regions. The United States imports Japanese and European autos while exporting American autos to Japan and Europe. These exchanges represent simultaneous imports and exports of different varieties of the same product. Observe that Xi Mi measures the amount of trade that does not involve intra- industry trade. Therefore, Xi Mi Xi Mi is the amount of intra-industry trade. If there is no trade overlap in industry i, so that either Xi or Mi is positive, but not both, the value of the index is equal to zero. For instance, if Xi > 0 and Mi 0, the index ‘s numerator is Xi Xi 0. By the same token, if Mi > 0 and Xi 0, the numerator is also equal to zero. By contrast, if there is complete trade overlap, so that Xi Mi, the index is equal to 1 (or 100 if the index is expressed as a percentage by multiplying by 100). The table also shows that intra-industry foreign direct investment (FDI) measured by a similar index is as important as intra-industry trade.