Firstly, intra-industry trade increases the variety of products the same industry, which is beneficial to both, businesses, as well as consumers. This benefit of intra-industry trade is possible because today product range from the same industry can be highly differentiated, and intra-industry trade will provide the opportunity of having a vast range of differentiated products within the markets of trading partners.
Secondly, intra-industry trade gives opportunity for businesses to benefit from the economies of scale, as well as use their comparative advantages.
In other words countries will get more economic benefits if they concentrate on producing specific types of products within specific range, according to their comparative advantages rather than producing all ranges of specific products. Thirdly, inter-industry trade stimulates innovation in industry, and can assist the economy in cases of short-term economic fluctuations.
The main benefit of intra-industry trade can be explained in simple terms by using an example of car trade between Japan and Germany.
Accordingly, when Toyota produces more family cars, the lower will be the unit cost, and similarly, more sports cars are produced by Audi, the lower unit price of the car will be.
Heckscher-Ohlin Model was developed by Eli Heckscher and Bertil Ohlin and offers a general equilibrium approach to the issues of international trade. The essence of the model can be summarised to the idea that countries will concentrate on exporting products for the production of which their abundant resources are required, at the same countries try to import those products for production of which resources required that are scare in respective country Kemp, Ruffin mentions three fundamental characteristics of Heckscher —Ohlin model of intra-industry trade as following:.
Firstly , each county exports products according to its comparative advantage. For instance, China produces and exports technology products because the low prices of relevant resources in China provide comparative advantage in producing and exporting this type of products, while Turkey mainly exports clothing products due to the cheaper prices of cotton and advanced textile industry present in Turkey.
Secondly , international trade that is based on the comparative advantage will benefit some industries, at the same time hurting other industries. For example, when UK exports technology abroad, technology companies will benefit; however, when clothing items are imported into UK, unskilled workers within clothing industry in UK will be hurt. However this theory has attracted criticism due to a set of assumptions it makes.
Specifically Heckscher-Ohlin Model assumes that there is a constant supply of productive factors in the in a country, the points of differences between of countries are only on factor endowment, and also the theory does not take into account technological progresses. Nevertheless, apart from the serious shortcomings of Heckscher-Ohlin theory, it still fails to explain intra-industry trade between countries, because the theory contradicts to the notion of intra-industry trade in fundamental level.
Specifically, Heckscher-Ohlin theory states that countries will engage in exporting those products for the production of which their abundant resources are going to be used. Intra-industry trade has evolved to be one of the important macro-economic practices that is beneficial in terms of maintaining macro-economic stability, promoting innovation and increasing the number of differentiated versions of the same type products in markets of the trading partner countries.
The above and other benefits of intra-industry trade have been explained in economic theory by various authors. However, Heckscher-Ohlin theory fails to explain intra-industry trade because the theory states that only product produced with abundant resources are going to be exported, scarce resource products will be imported to a country, whereas countries engaged in intra-industry trade use the same resources.
While trade between countries is can be imports and exports, depending on if the goods are coming into country, or leaving the country; movement of goods within European Union is referred to as arrivals and dispatches. This amount is more than double the amount of trade engaged in with non-EU countries. The share of dispatches within EU compared to exports to countries outside of EU for each country is presented on the following table:. The importance of the internal market was highlighted by the fact that for each of the Member States, intra-EU trade of goods was higher exports.
We can see that intra-EU trade decreased in even more significantly compared to the exports. There are many reasons for this change, and of the main reasons can be pinpointed to be the global economic crisis that started in US in , and within a short period of time extended to all EU member countries as well. This was the reasons why latter countries suffered the most from the global economic crises of In order to analyze performance of any given member of EU, looking at intra-industry trade would not suffice; rather the trade surplus extra and intra-EU combined should be looked at.
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All rights reserved. Sign in to annotate. International trade is traditionally thought to consist of each country exporting the goods most suited to its factor endowment, technology, and climate while importing the goods least suited for its national characteristics. Such trade is called inter-industry trade because countries export and import the products of different industries.
But the top exports and imports of most industrial countries are actually similar items, such as passenger cars, electrical generators, or valves and transistors. Indeed, passenger cars are the number one export and import of Great Britain, Germany, and France.
In the real world, international trade is largely trade within broad industrial classifications. Intra-industry trade occurs when a country exports and imports goods in the same industry. Intra-industry trade has been a hot topic among trade economists for several decades, but it has received scant attention among economists in general. In the debate over NAFTA, for example, commentators focused much attention on America's inter-industry trade with Mexico but none on the far more important intra-industry trade.
This article begins with a brief summary of Ricardian and factor endowment approaches to trade theory to highlight the contribution of intra-industry trade theory. Next, the article discusses the foundations of intra-industry trade theory and the significance of intra-industry trade for an economy. Finally, the U. To understand why trade economists have turned their attention to intra-industry trade, it is necessary to understand the implications of inter-industry trade.
Standard trade theory involves trade in homogeneous products; hence, with perfect competition there is only inter-industry trade.
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