Application: Intra-industry vs.

Inter-industry Trade
Professor Ralph Ossa
33501 International Commercial Policy
 International Commercial Policy
IIT Application

A Heckscher-Ohlin-Krugman model
Recall that the Heckscher-Ohlin-Krugman model
captures both inter-industry as well as intra-industry
trade.

As in the Heckscher-Ohlin model, countries trade one

good for the other good (for example, cloth for food).

As in the Krugman model, countries trade some

varieties of each good for other varieties of the same
good (for example, Levis jeans for other jeans or
ketchup for soy sauce).
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 International Commercial Policy
IIT Application

A Heckscher-Ohlin-Krugman model (cont.)

In our standard setup, Home is then still a net exporter
of cloth and a net importer of food but also imports
some cloth and exports some food.
Home(labor-
abundant)
Cloth Food
Intra-industrytrade
Inter-industrytrade

Inter-industrytrade
Intra-industrytrade

Foreign(land-
abundant)

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 International Commercial Policy
IIT Application

A Heckscher-Ohlin-Krugman model (cont.)

The relative importance of intra-industry trade in a given
industry between a given country pair (say Homes cloth
trade with Foreign) is typically measured by the Grubel-
Lloyd index:

| EXPcloth IMPcloth |
IITcloth = 1
EXPcloth + IMPcloth

Without intra-industry trade, IMPcloth = 0 so that the index

is 0. Without inter-industry trade, EXPcloth = IMPcloth so that
the index is 1.
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 International Commercial Policy
IIT Application

A Heckscher-Ohlin-Krugman model (cont.)

The relative importance of intra-industry trade in a given
industry between a given country pair is essentially
determined by how well this trade is characterized by
the Krugman model relative to the Heckscher-Ohlin
model.

In particular, the relative importance of intra-industry

trade is increasing in (i) the similarity of the countries
factor endowments, and (ii) the importance of IRS and
product differentiation in the industry.

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 International Commercial Policy
IIT Application

A Heckscher-Ohlin-Krugman model (cont.)

As an illustration, consider U.S. trade with China and
Germany in 1995 in two particular industries:
U.S. IMP ($) U.S. EXP ($) IIT
Germany 5,190,887 12,120,614 .60
China 203,020,411 4,398,230 .04
SIC 2273: Carpets and Rugs

U.S. IMP ($) U.S. EXP ($) IIT

Germany 151,973,484 109,257,787 .84
China 6,320,488 106,620,359 .11
SIC 3511: Steam, Gas, and Hydraulic Turbines, and Turbine Generator Set Units

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 International Commercial Policy
IIT Application

A Heckscher-Ohlin-Krugman model (cont.)

Recall, however, how sensitive these numbers are to
the chosen level of aggregation.

As an illustration, the following table repeats the

calculations for Germany using the 29 subcategories of
Steam, Gas, and Hydraulic Turbines, and Turbine
Generator Set Units available in standard U.S. trade
data.

Notice that fewer industries now have a positive

Grubel-Lloyd index, just as one would expect.

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 International Commercial Policy
IIT Application

A Heckscher-Ohlin-Krugman model (cont.)

COUNTRY DESCRIPTION IMPVALUE EXPVALUE IIT
GERMANY ROTORS,FINISHED FOR FINAL ASSEMBLY,PRT OF STEA TUR 6,030,103 0 0
GERMANY TURBOJET TURBINES, EXC A/C, THRUST NOT EXCE 0 478,502 0
GERMANY STEAM TURBINES,EXC MARINE PROPUL, NOT EXC 7,460 KW 0 695,116 0
GERMANY ROTORS,SPINDLES,OR THEIR ASSEMBLIES FOR STEAM TURB 2,467,256 0 0
GERMANY PARTS OF NONAIRCRAFT TURBOJETS AND TURBOPROPELLERS 0 933,458 0
GERMANY PARTS OF NONAIRCRAFT GAS TURBINES, NESOI 104,319,553 0 0
GERMANY ROTORS,SPINDLES,OR THEIR ASSEMB. FOR NONAIR. GAST. 70,680 0 0
GERMANY PARTS OF TURBOJET OR TURBOPROPELLER NONA/C ENGINES 659,832 0 0
GERMANY CAST-IRON PTS,CLEAN ONLY,NONA/C GAS TURBINES,NESOI 65,022 0 0
GERMANY BLADES, ROTATING OR STATIONARY,PRTS OF STEAM TURBI 1,485,925 0 0
GERMANY PARTS OF NONAIRCRAFT GAS TURBINES 0 39,747,282 0
GERMANY GENERATING SETS, ELC, NESOI 18,202,539 0 0
GERMANY PARTS FOR STEAM TURBINES 0 141,501 0
GERMANY HYDRAULIC TURB & WTR WHEELS POWER>1,000KW<10,000KW 43,776 0 0
GERMANY VAPOR TURBINES,EXCEPT STEAM, FOR MARINE PROPULSION 25,868 0 0
GERMANY PARTS FOR OTHER THAN STEAM VAPOR TURBINES 0 4,906,373 0
GERMANY PARTS OF VAPOR TURBINES, NESOI 66,491 0 0
GERMANY STEAM TURBINES,EXC MARINE PROP,EXCEEDING 7,460 KW 142,130 0 0
GERMANY STEAM TURBINES,EXC MARINE PROPUL, NOT EXC 7,460 KW 3,419,600 0 0
GERMANY PARTS OF STEAM TURBINES, NESOI 11,797,465 0 0
GERMANY HYDRAULIC TURBINES AND WATER WHEELS POWER>10,000KW 0 5,350 0
GERMANY STEAM & OTH VAPOR TURBINES FOR MARINE PROPULSION 0 161,202 0
GERMANY TURBOJET TURBINES, EXC A/C, THRUST EXCEEDING 25 KN 5,800 1,542,263 0.0074932
GERMANY GAS TURBINE ENG,EXC A/C,NESOI, POWER EXCEED 5,000K 423,489 52,954,818 0.0158675
GERMANY VAPOR TURBINES, EXC STEAM, EXC MARINE PROPULSION 13,268 1,551,842 0.0169547
GERMANY GAS TURBINE ENG,EXC A/C,NESOI,POWER NOT EXC 5000KW 776,951 3,450,352 0.3675871
GERMANY PARTS, INC REGULATORS, FOR HYDRAULIC TURB & WTR WH 185,387 527,865 0.5198359
GERMANY HYDRAULIC TURBINES,WATER WHEELS, NOT OV 1,000 KW 21,222 15,410 0.8413409
GERMANY ENGINES AND MOTORS, NESOI 1,751,127 2,146,453 0.8985714

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 International Commercial Policy
IIT Application

A Heckscher-Ohlin-Krugman model (cont.)

The book reports Grubel-Lloyd indices for some U.S.
industries summing U.S. exports and imports over all
U.S. trading partners: