tutor2u | Globalisation - Intra Industry Trade

Study Notes

Globalisation - Intra Industry Trade

Level:
A Level
Board:
AQA, Edexcel, OCR, IB

Last updated 22 Mar 2021

Intra-industry trade means trade within industries

A measure of the intra-industry trade that takes place between countries is the Grubel-Lloyd (GL) index.

E.g. If a country only exports or imports good X (e.g. sugar) then the GL index for that sector is equal to 0. On the other hand, if a country imports exactly as much of good X as it exports, then its GL score for sector would be 1.

Intra-industry trade and stages of development

Developed economies and rapidly industrialising developing economies (e.g. Hong Kong, China; Singapore; Malaysia and Thailand) tend to engage in more intra-industry trade

Resource-rich developing economies and Less Developed Countries tend to have relatively little intra-industry trade

Economies such as Malaysia and Thailand have more intra-industry trade with other developing countries in the same region

Japan has more intra-industry trade with developing economies – it is net importer of commodities and it is also geographically close to several emerging "industrialized" countries such as South Korea. There is increasingly intense competition between Japanese and South Korean manufacturing conglomerate businesses

A major development theme in recent years has been for countries to build a deeper level of complexity into their economy.

Intra-industry trade for developing countries

We observe that poor countries, even if similar in terms of income, trade much less with each other compared with rich countries

Countries where overall labour and capital productivity is low have lower wages and produce less differentiated goods and services

Many of these countries are heavily reliant on a small number of products – this gives rise to primary product dependency

Read: The Road Less Travelled – African Intra-Regional Trade – a 2013 article from the Economist: www.economist.com/blogs/baobab/2013/04/intra-african-trade

Read: Why Africa is becoming less reliant on commodities (Economist magazine, January 2015): www.economist.com/blogs/economist-explains/2015/01/economist-explains-5?fsrc=scn/tw_ec/why_africa_is_becoming_less_dependent_on_commodities

Intra-industry trade for a selection of countries

Explanations for rising intra-industry trade

Demand-side explanations

Supply-sid e explanations

Strong consumer preferences for variety and choice from different countries

Advantages of economies of scale and rising intra-firm trade within multi-national businesses

Lower tariffs reduce prices of imported goods and services thereby boosting demand

Falling transportation costs especially for "smaller" high value manufactured goods

Increasing openness of countries to products from many different nations

Foreign direct investment and improving human capital allows more countries to produce similar intermediate and final products

Zambia

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