Vertically Differentiated Trade and Differences in Factor Endowment: The Case of Agri-Food Products between Hungary and the EU

Abstract

The paper investigates the relationship between factor endowment and vertical intraindustry trade (IIT)in agri-food products between Hungary and the EU. Intra-industry trade is separated into its horizontal and vertical components on the basis of differences in unit values. Three different approaches to measuring IIT are employed and these are then tested using panel regression models. Results show vertical type trade is predominant in total IIT for agri-food products. In order to achieve more general results, we consider different types of productive factors: land, human and physical capital. Using Flam and Helpman type vertically differentiated trade models, we find a positive relationship between factor endowment and vertical IIT. More importantly, using a measure of IIT that reflects the level of trade produces better regression results than those based on the degree or share of IIT.