Intraindustry Trade of Intermdediate Goods: Determinants and Welfare

The purpose of this paper is to develop a simple model which considers economies of scale and product differentiation in intermediate goods and to examine the implications for trade patterns and welfare. We have shown that the intersectoral pattern of trade is determined by the cross-country difference in relative factor endowments but that there also is intraindustry trade. In addition, the share of intraindustry trade in total trade is increasing as countries become similar in relative factor endowments. The more important the intermediate goods in the production of the final goods, the more differentiated the intermediate goods, and the more capital abundant the home country, both factors can gain from trade.