Abstract
Intra-industry trade has practical implications for the extent of direct competition countries face. Our paper contributes to the literature by proposing a new index of intra-industry trade that incorporates information from product-level trade data. The new index categorizes trade as intra-industry only if exports and imports are close substitutes as measured by the average proximity of their prices. This criteria of qualifying as intra-industry trade is based on product characteristics unlike the traditional Grubel–Lloyd (GL) index which is based on the level of data aggregation. GL index rises automatically with data aggregation creating serious questions regarding its dependability as a reasonable measure. By capturing substitutability of exports and imports, the new measure remains true to the theoretical definition of intra-industry trade irrespective of the level of data aggregation. The new index estimates intra-industry trade was, on average, only 14% as compared to the 21% estimated by the GL index for the US between 1989 and 2001. Furthermore, the new index yields estimates that have no predictable relation to data aggregation and remain quite stable as the level of aggregation changes.
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Notes
4853/(7571 + 14,919–4853) = .275.
A short and simple exposition of the model can be found in Bhagwati et al. (1998, pp. 184–186).
Acquino (1978) and Helpman (1987) have noted that an imbalance in trade biases the GL index in ways that does not lend itself to correction. For example, suppose beginning with balanced trade initially, a trade deficit arises. Suppose further that the deficit arises because the exports of a product not subject to two-way trade fall. This will not change the numerator but will reduce the denominator. The GL index will rise in value despite no change in the extent of two-way trade. On the other hand, suppose the deficit arises because the imports of a product not subject to two-way trade rise. Again, the numerator is unchanged but this time the denominator rises and the GL index falls. Finally, suppose the deficit arises because the imports of a product subject to two-way trade rise but they are initially more than the exports of the same product. Once again, the numerator does not change but denominator rises and the GL index falls.
For example, consider two products, 1 and 2, with (X1, M1) and (X2, M2) as the associated flows of exports and imports, respectively. First, suppose product 1 exhibits trade surplus and product 2 is subject to trade deficit. Then these two products contribute 2(M1 + X2) to the numerator of the GL index. If we aggregate over these products and the resulting new product exhibits trade surplus, it contributes 2(M1 + M2) to the numerator of the index. Given M2 > X2 by assumption, the aggregation leads to an increase in the value of the numerator. If the aggregated product exhibits trade deficit, it contributes 2(X1 + X2), which also raises the numerator since X1 > M1 by assumption. Second, if products 1 and 2 both show a deficit or both show surpluses, aggregating over them leaves the numerator of the GL index unchanged.
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Mukerji, P., Panagariya, A. Investigating the composition of product-level specialization. Ind. Econ. Rev. 54, 3–18 (2019). https://doi.org/10.1007/s41775-019-00047-4
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DOI: https://doi.org/10.1007/s41775-019-00047-4