international trade... Munich Personal RePEc Archive presented by bba 4 (b) ...leader's group 1

1. INTRA-INDUSTRY TRADE: THE PAKISTAN
EXPERIENCE
B Y
S H A Z I A P I T A F I
N A I N A
U Z A I R A H M E D
A M B R E E N
M A H N O O R A S L A M
A B D U L L A H
B A R K A T U L L A H

2. INTRA INDUSTRY TRADE DEFINED
The simultaneous exports and imports of a product within country or a particular
industry called intra-industry trade (IIT) or two-way trade.

3. BENEFITS OF INTRA INDUSTRY TRADE:
o increases the variety of products the same industry, which is beneficial
to both, businesses, as well as consumers.
o benefit from the economies of scale, as well as use their comparative
advantages (In other words countries will get more economic benefits
if they concentrate on producing specific types of products within
specific range, according to their comparative advantages rather than
producing all ranges of specific products.).
o assists the economy in cases of short-term economic fluctuations.

4. DISADVANTAGES OF INTRA INDUSTRY TRADE :
• if the quality of imported one is high or its price is relatively low then in long run your
industry would suffer.

5. PRE REQUISITE TERMINOLOGY FOR THE ARTICLE
1. liberalizing the international trade :
the removal or reduction of the restrictions on the international trade i.e. decreasing
custom duty, tarrifs etc so that the trade may be easy.
2. OECD countries : organisation for economic cooperation and development (an
association among some countries )

6. CONT:
3. commercial policy :
(also referred to as a trade policy or international trade policy) is a set of rules and
regulations that are intended to change international trade flows, particularly to
restrict imports
4. .import substitution : reducing the foreign imports by domestic production

7. Neo-Chamberlinean model: consumer have similar prefrences for different varieties of
goods.
Neo-hotelling model: consumer do not have similar preferences for different varieties of
goods.

8. CONT :
5. Cournot competition : in which competing firms that make the same homogeneous
and undifferentiated product choose a quantity to produce independently and
simultaneously.
6 . reciprocal dumping : the sales by firms from two countries into each others market
at prices below that each charges at home .
7. Foreign direct investment: controlling ownership in business enterprise in one
country by an entity based in another country.

9. INTRODUCTION :
Verdoorn (1960), Balassa
(1966):
became aware that certain
developed countries exported and imported in the same product categories
Grubel and Lloyd
(1975) :
developed the most popular index for measurement of intra-industry trade
Helpman and Krugman (1985) synthesized the various attempts to model IIT
Helpman analyzed the
OECD countries and tests some hypotheses of the model of Helpman and Krugman (1985).
His results were according to the theory.

10. CONT :
Hummels and Levinsohn (1995) continued the work of Helpman (1987). The
authors analyzed the results for all OECD countries and then extending to test
non-OECD countries with panel data The results have questioned at least
partially, the findings obtained by Helpman (1987)
They used three estimaters OLS, Fixed effect and Random effects

11. INTRA INDUSTRY TRADE AND PAKISTAN
o Followed import substitution policy for increasing industrialization which was
highly supported by increased tarrifs , and taxes.
o Joined two regional trading blocks that is SAARC and ECO ( economic
cooperation organization)

12. LITERATURE REVIEW
• Similar countries have little reason to trade( H-O model )
• Horizontal IIT Model
• Vertical IITT Model

13. HORIZONTAL IIT MODEL
o Same stage of production
o Consumers have similar preference
o Incorporate transport costs and the reciprocal dumping

14. VERTICAL IIT MODEL
o The quality is assumed to be directly related to the capital-labor ratio
o A capital-rich country is likely to produce higher-quality products; while a
labor-rich country is likely to produce lower- quality products.
o The unequal income is assuming a source of the demand for variety of
vertically differentiated products, a larger difference in income will increase
the share of vertical IIT.

15. SHAKED AND SUTTON 1984
o Demand for each quality of the product depends on the distribution
of income.
o Firms face three-part decision process – entry, quality and price.

16. CLARK (2006)
o there are places more efficient (i.e with low production costs) and that is
linked with vertical specialization
o He used tobit ( mod function ) and probit ( deviation from the mean of
standard distribution) at a country and industry
level

17. WAKASUGI
o constructed an index of vertical intra-industry trade to measure the
fragmentation (production away from the home country to another country) of
production,
o used a gravity model and analyzed the impact of VIIT
in East Asia, NAFTA, and European Union
o concluded that fragmentation
increased with intra-industry trade.

18. LEITÃO AND FAUSTINO (2009)
 examines the determinants of intra-industry trade in the
automobile component sector in Portugal.
 IIT occurs more frequently among countries that are similar
endowments.
 that trade increases if the transportation costs decrease.

19. MEASUREMENT OF IIT
o Grubel and Lloyd (1975) index
o IIT is the difference between the trade balance of industry i and the total trade
of this same industry
o When will be trade totally intra industry and when totally inter inter industry

20. NAINA

21. EXPLANATORY VARIABLES
o (DGDP): his is difference in GDP between Pakistan and the partner country
o Loertscher and Wolter (1980) , Hummels and Levinshon (1995) and
Greenaway et al. (1994) found a negative sign.
o MinGDP: this is the lowest value of GDP per capita
o According to Helpman (1987) and Hummels and Levinshon (1995), a positive
sign is
expected,
o MaxGDP: this is the higher/highest value of GDP per capita
o A negative sign is expected, as in Helpman (1987), Hummels and Levinshon
(1995)
o the more similar countries are in economic dimension, the greater the IIT
between them

22. CONT :
o DIM: is the average of GDP per capita between Pakistan and the partner
country
o Umemoto (2005) , Leitão and Faustino (2009) also found a positive sign to
Portuguese case.
o DIST: this is the geographical distance between the Pakistan and the partner country
o A longer distance will increase the transaction and transportation costs.
Thus, there is a negative relationship between the share of IIT in the
industry and geographical distance.
o FDI: (Foreign Direct Investment inflows)
o the relationship between IIT is somewhat ambiguous since FDI may be a
substitute for the trade.
o Greenaway et al. (1994) estimated a positive sign for the coefficient of this
variable;
o TIMB (Trade Imbalance): Following Lee and Lee (1993) our paper considers the
trade
imbalance as control variable, where TIMB is defined as: net trade as a share of
trade

23. DOES H-O MODEL HOLD FOR INTRA INDUSTRY TRADE :
o Countries don’t produce and export the goods with abundance only
o will benefit some industries, at the same time hurting other industries (For example,
when UK exports technology abroad, technology companies will benefit; however,
when clothing items are imported into UK, unskilled workers within clothing industry
in UK will be hurt.)

24. CONCLUSION
• Economic Dimension(DIM): The market size benefit and influence the IIT.
• We expected –ve sign to geographical distance.
• In relation commercial policy we can refers that SAFTA could be an important
mare to Pakistan but IIT is incipient.
• IIT occurs among countries with similar level of demand.