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Inter vs Intra Industry Trade Explained

Intra-industry trade involves the exchange of differentiated products within the same industry between countries. It arises to take advantage of economies of scale in production. In contrast, inter-industry trade involves the exchange of goods between different industries based on differences in factor endowments between countries. The intra-industry trade theory differs from the Heckscher-Ohlin theory in several ways. The H-O theory is based on comparative advantage from differences in factor endowments, while intra-industry trade is based on product differentiation and economies of scale. Intra-industry trade predictions are not based on pre-trade commodity prices. Intra-industry trade also allows all factors of production to potentially gain, unlike the H-O theory

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73 views4 pages

Inter vs Intra Industry Trade Explained

Intra-industry trade involves the exchange of differentiated products within the same industry between countries. It arises to take advantage of economies of scale in production. In contrast, inter-industry trade involves the exchange of goods between different industries based on differences in factor endowments between countries. The intra-industry trade theory differs from the Heckscher-Ohlin theory in several ways. The H-O theory is based on comparative advantage from differences in factor endowments, while intra-industry trade is based on product differentiation and economies of scale. Intra-industry trade predictions are not based on pre-trade commodity prices. Intra-industry trade also allows all factors of production to potentially gain, unlike the H-O theory

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(a)Differentiate between “inter” and “intra” industry trade.

(6 marks)
• Great deal of international trade can and does involve the
exchange of differentiated products of the same industry or broad product group.
• Intra-industry trade in differentiated products which is a trade of products that belong to the
same industry. It arises to take advantage of important economies of scale in production.
That is, international competition forces each firm or plant in industrial countries to produce
only one, or at most a few, varieties and styles of the same product rather than many
different varieties and styles. This is crucial in keeping unit costs low.
• For example: M company previously produce 5 colours of chairs which need 5 machinery,
but now due to the intra-industry trade, M company specialize to produce 2 colours of
chairs and hire 2 machinery. With few varieties and styles, more specialized and faster
machinery can be developed for a continuous operation and a longer production run. The
nation then imports other varieties and styles from other nations. Intra-industry trade
benefits consumers because of the wider range of choices available at the lower prices made
possible by economies of scale in production.
– Inter-industry trade is a trade between countries where exports and imports consist of
different types of goods. Such trade is based on differences of products that belong to
different industries.
– For instance, the trade of agricultural products produced in one country(India) with
technological equipment produced in another country(Malaysia) can be classified to be an
inter-industry trade.
– Countries usually engage in inter-industry trade according to their competitive advantages.
(b)How does the intra industry trade theory differ from the Heckscher-
Ohlin (H-O) theory in explaining the international trade? Discuss

1. Trade in the H–O model is based on comparative advantage or differences in factor


endowments (labor, capital, natural resources, and technology) among nations, intra-industry
trade is based on product differentiation and economies of scale and will likely to be larger
when the difference in factor endowments among nations is greater, larger among industrial
economies of similar size and factor proportions.
2. With differentiated products produced under economies of scale, pretrade-relative
commodity prices may no longer accurately predict the pattern of trade. For instance, a large
country may produce a commodity at lower cost than a smaller country in the absence of trade
because of larger national economies of scale. With trade, however, all countries can take
advantage of economies of scale to the same extent, and the smaller country could conceivably
undersell the larger nation in the same commodity.
3. H–O model, which predicts that trade will lower return of the nation’s scarce factor,
with intra-industry trade based on economies of scale it is possible for all factors to gain
(involve lower real wages and massive reallocations of labor to other industries in industrial
nations).
4. Intra-industry trade is related to the sharp increase in international trade in parts and
components of a product, or [Link] utilization of each nation’s comparative
advantage to minimize total production costs can be regarded as an extension of the basic
H–O model to modern production conditions. This pattern also provides greatly needed
employment opportunities in some developing nations.

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