What is intra-industry trade? Is intra-industry trade consistent with the predictions of the Heckscher-Ohlin theory? Explain, and relate your discussion to evidence about trade between industrialized countries and developing counties, and about trade among industrialized countries.

Question

What will be an ideal response?

Answer 1

POSSIBLE RESPONSE: Intra-industry trade is trade in which a country both exports and imports the same or very similar products. Intra-industry trade is not generally consistent with the Heckscher-Ohlin theory. The Heckscher-Ohlin theory predicts that countries will export goods that intensively use their abundant resources and will import goods that intensively use their scarce resources. For most products, factor intensity is not likely to vary enough (across countries producing a product) to be able to use Heckscher-Ohlin theory to explain why a country both exports and imports the product. The Heckscher-Ohlin theory is suited to explain trade between developing and industrialized countries because they differ in their endowments of production resources. However, about 70 percent of the exports of industrialized countries are shipped to other industrialized countries, and the trade among industrialized countries accounts for about 40 percent of the total world trade. Much of this trade among industrialized countries is intra-industry trade. The Heckscher-Ohlin theory cannot explain why we observe such trade patterns among industrialized nations that have broadly similar relative factor endowments.