Intraindustry trade: Trade that occurs when a country exports and imports goods within the same industry or product group.
Intraindustry Trade index: Formula for measuring the percentage of inter-industry trade versus intra-industry trade. The closer to 1 the formula is, the closer to 100 percent intraindustry trade is. Closer to 0 indicates no intra-industry trade. The formula is very dependant on how industries are defined.
Intra-industry formula is:
1 - | X – M |
X + M
Trade in Homogenous Goods:
- Materials that are bulky or heavy to transport. Example: cement. If a U.S. company needed cement and a foreign supplier was closer, then purchasing the material from that supplier would count as intraindustry trade.
- Homogenous services. These include things such as transportation and insurance transactions between an exporter and importer. The services necessary to transport and move goods between countries counts as intra-industry trade.
- Entrepot trade. Trade where goods are imported into a country. Later that same good is sent to another country. The middle-man country is acting as storage for the trade.
Horizontally differentiated goods: Goods that differ in some way, though their prices are similar. Ex: Candy bars.
Vertically differentiated goods: Goods that have very different physical characteristics and different prices. Ex: cars.
Imperfect competition: A firm is able to influence the price of a good by changing the quantity available for sale. This does not occur in markets where there are so many competitors, that price is set by the market (perfect competition).
Monopolistic competition: A market where there are many firms, and each firm has some market power from product differentiation. Ex: law firms, dentists, radio stations.
The product cycle: Changes in technology or a new product design can change the pattern of imports and exports. This says that developed countries specialize in creating new goods based on technological innovation. Developing countries tend to specialize in products that are already well established. At first production of the product is specialized and expensive. As time goes on, the process will become standardized to the point where the processes are moved to developing countries to cut down on more costs. Ex: Development cycles for TVs, VCRs, etc.
Overlapping Demands: Trade in manufactured goods is likely to be greatest among countries with similar tastes and income levels. This theory does not explain the growing level of trade between developed and developing countries.
Welfare gains from intraindustry trade:
- Product differentiation results in imperfect competition, causing inefficency, unused capacity, and under-used factories. The result is higher pricing that what the consumer might have otherwise paid for a good. Imports help to relieve some of this by lowering prices. Thus intra-industry trade helps lower costs for consumers by introducing imports.
- Intra-industry trade improves welfare by allowing more consumer choice and increases competition.
- Intra-industry trade reduces the monopoly power of domestic firms.
- Intra-industry trade allows firms to produce at higher levels of output.
- When inter-industry trade occurs, there is are adjustment costs associated with different output levels. With intra-industry trade, there is less adjustment because trade occurs among already similar production countries. The impact on industry is not as great. It is also easier to re-allocate resources among the affected industries as they are more closely related.
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