Question

“When differences between countries’ factor endowments are significant the inter-industry trade will dominate trade flows, but when these differences are small or non-existent the intra-industry trade will tend to dominate trade flows.” Do you agree or disagree? Evaluate fully. Make sure you outline the key theory (ies) of intra-industry trade in answering this question.

Answer 1

I agree that when differences between the countries factor endowments are significant ,inter-industry trade will dominate the trade flows and when the differences between the countries factor endowments are small and little intra-industry trade will dominate the trade flows.Inter industry trade takes place when there is perfect competition and the import and exports consists of different type of goods.Inter industry trade is based upon the differences in the factor endowments.In the case of inter industry trade the countries will import and export goods of different industries.Here the trade is not between the same economies.Under intra industry trade the countries will export those goods which uses relatively abundant factor where as the countries will import those goods whose production requires the intensive use of scarce resources.Hecksher Ohlin theory is an example.In the case of intra industry trade the trade will happen between the similiar economies and when there is imperfect competition.The differences of factor endowments within the countries is less.The theories of absolute cost advantage and comparative advantage are examples of intra industry trade.Under intra industry trade there is exchange of similiar products belonging to the same industries.There homogeneous production of factors under intra industry trade.Absolute cost advantage takes place when the firms are able to produce greater quantities of product at same cost or same quantities of goods at lower cost.Same goods are exchanged between the industries under intra industry trade.