GEP Research Paper 08/36
Endowment Differences and the Composition of Intra-Industry Trade
Manuel Cabral, Rod Falvey and Chris Milner
Summary
This paper considers the relationship between endowment differences and different types of trade. An illustrative theoretical model is used to derive hypotheses which are then tested on EU trade.
Abstract
This paper investigates the relationship between differences in endowments and different types of trade, in particular vertical intra-industry trade (VIIT). We build a general equilibrium framework based on a hybrid of the Chamberlain-Heckscher-Ohlin and the specific factors models that generates predictions about how the shares of different types of intra-industry and net trade flows change with differences in endowments. We also present some empirical evidence for European Union trade with its 51 major trading partners. The econometric models of the determinants of the different types of trade confirm the theoretical predictions, namely that the effect of cross country differences in the endowments of trading partners on the share of vertical IIT in total bilateral trade differs from their effect on both horizontal IIT and net trade. The share of horizontal IIT (net trade) decreases (increases) for all increases in absolute endowment differences, but the share of vertical IIT can both increase and decrease with increases in endowment differences.
JEL classification: F11, F14
Keywords: Intra-industry trade, factor endowments
Issued in October 2008
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