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Intra‐industry Trade and Industry Distribution of Productivity: A Cournot–Ricardo Approach

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  • E. Young Song
  • Chan‐Hyun Sohn

Abstract

This paper constructs a Cournot-Ricardo model of trade by incorporating Cournot competition in a Ricardian trade model. In this model, the share of intra-industry trade in bilateral trade volume decreases as trading partners become more different in terms of the industry distribution of labor productivity. We show that this relationship is a special case of a more general relationship: the share of intraindustry is decreasing in a specialization index. This specialization index turns out to be equal to the difference in the industry distribution of productivity in the case of our Cournot-Ricardo model, while it is given by the difference in capital-labor in the well-known case of monopolistic competition. As both technologies and factor endowments would be important in shaping specialization patterns in the real world, we conjecture that the share of intra-industry trade is decreasing in two measures of specialization: the difference in the industry distribution of productivity and the difference in capital-ratio. Our OLS estimations strongly support this conjecture. In fixed effects regressions, both measures lose significance in the entire sample, but the industry distribution of productivity is significant in explaining trade between high income countries.
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Suggested Citation

  • E. Young Song & Chan‐Hyun Sohn, 2012. "Intra‐industry Trade and Industry Distribution of Productivity: A Cournot–Ricardo Approach," The World Economy, Wiley Blackwell, vol. 35(4), pages 461-482, April.
    • Handle: RePEc:bla:worlde:v:35:y:2012:i:4:p:461-482
    DOI: j.1467-9701.2012.01446.x
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    Cited by:

    1. Alexandra M. Espinosa, 2018. "The Cournot-Ricardo Solution under Domestic Free Movement of Labour," Journal of Industry, Competition and Trade, Springer, vol. 18(3), pages 295-302, September.
    2. Regolo, Julie, 2013. "Export diversification: How much does the choice of the trading partner matter?," Journal of International Economics, Elsevier, vol. 91(2), pages 329-342.
    3. Ruhul Salim & Amirul Islam & Harry Bloch, 2018. "Patterns And Determinants Of Intra-Industry Trade In Southeast Asia: Evidence From The Automotive And Electrical Appliances Sectors," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 63(03), pages 647-665, June.
    4. Rebecca Neumann & Saleh S. Tabrizy, 2021. "Exchange Rates and Trade Balances: Effects of Intra-Industry Trade and Vertical Specialization," Open Economies Review, Springer, vol. 32(3), pages 613-647, July.
    5. E. Young Song & Chen Zhao, 2012. "Does Specialization Matter for Trade Imbalance at Industry Level?," East Asian Economic Review, Korea Institute for International Economic Policy, vol. 16(3), pages 227-247.

    More about this item

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation

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