From: glevy@PRATT.EDU
Date: Thu Feb 24 2005 - 07:46:43 EST
---------------------------- Original Message ------------------------ Subject: A new anomaly for the Ricardian theory of international trade From: "Jurriaan Bendien" <andromeda246@hetnet.nl> Date: Thu, February 24, 2005 5:15 am ---------------------------------------------------------------------- After looking at the international trade in cars a while ago, I was motivated to inquire further into the phenomenon of goods of the same type being both imported and exported (I am not talking about re-export here). We are used to thinking of different countries exchanging different kinds of products in international trade, which provides a rationale for the theory of comparative advantage. But what if trade between different countries involves products which are basically identical in type, apart from their brands? In reality, it is a growing trend, not just in Europe or between the USA and Mexico, but also in Australasia. New Zealand's foreign trade ministry for example comments: "The world's trade patterns have changed very markedly in the past few decades. International trade is no longer dominated by the simple nineteenth century Ricardian model of exchange of British cloth for Portuguese wine or the Heckscher Ohlin explanation of inter-industry trade patterns. One of the most important trends has been the emergence and growth of intra-industry trade, particularly between developed countries. Intra-industry trade (IIT) is defined as the simultaneous import and export of goods within the same industry. For example, New Zealand and Australia simultaneously export and import Steinlager and Fosters beer between each other, while Japan and the United States both export and import automobiles. This is very different from inter-industry trade, which involves countries exchanging the products for different industries. (...) Grubel and Lloyd (1975) were the first economists to seek to measure the significance of intra-industry trade. They measured IIT as the proportion (percent) of a country's total trade (exports plus imports) in the products of a given industry which was matched or balanced (exports roughly equaled imports) at one end of the scale and large imbalances at the other end." [see Grubel, H. G. and Lloyd, P.J. (1975), Intra-Industry Trade: The Theory and Measurement of International Trade in Differentiated Products, London and New York: John Wiley & Sons.] http://www.mfat.govt.nz/foreign/eco/ausnztrade/bilatetradenzaus.html#_ftn2 As regards the literature: "Verdoon (1960) was the first to report on observations of intra-industry transactions between European countries in a study of the changes in intrablock trade of the Benelux region. Balassa (1966) defined intra-industry trade as the inter-country exchange of commodities belonging to the same industry. They observed that adjustment to intra-industry trade has a lesser cost than adjustment to inter-industry trade due to the less disruptive effects of minimal changes in factor income distribution. After many years of obscurity, Grubel and Lloyd (1975) re-ignited interest in the concept of intra-industry trade and brought it to the attention of trade theorists by posing questions which the current trade theory could not answer. They identified economies of scale, location theory, and monopolistic competition as the most important concepts in developing a model of intra-industry trade, while pinpointing product differentiation as the underlying factor resulting in intra-industry trade. Krugman (1979) developed a model which suggested that increasing returns to scale lead to intra-industry trade of differentiated products between countries with identical characteristics in a Chamberlinian monopolistic competition market structure. Hamilton and Kniest (1991) expanded upon the work of Caves (1981) showing the importance of increases in the share of 'new' intra-industry trade over increases in just the share of intra-industry trade." http://www.nssa.us/nssajrnl/23_1/htm/10.htm In "Trade overlap and intra-industry trade" (Economic Inquiry 13, 1975, pp. 581-589), J. Michael Finger described IIT as a statistical artifact created by the vagaries of statistical classifications: products categorised as being the same type were really different. But David Greenaway and Chris Milner 1983 show in "On the Measurement of Intra-Industry Trade (Economic Journal 93, 1983, pp. 900-908) that although the share in IIT may reduce at a disaggregated level, it does not disappear. Evidently in the era of "globalisation" it is profitable for private enterprises in a country both to import and export the same type goods of the same type! One wonders about the economic and ecological rationality of that. Jurriaan
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