Vertical allocation of the production between identical countries: intra-industry trade in both a final good and the connected intermediate good

Abstract

This article analyses the economic advantages of intra-industry trade in both a final good and the connected intermediate good. In comparison with a situation of autarky, this type of trade brings about an increase in the total number of intermediate good varieties and thereby a reduction in the number of adaptations of intermediate goods to the production process. In this way, the producers of final goods will benefit from varieties of intermediate goods that are closer to the ideal for a specific production process. This determines an increase in the final good productivity and thereby a decrease in the final good price. Thereby both national and global welfare will increase.