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Regime Selection as an Alternative to the Grubel-Lloyd Index


  • Honggue Lee


Abstract This paper contends that the regime selection probability can provide an “empirically justifiable†alternative to the GL index as a measurement of intra-industry trade. The regime selection probability is an average of sample selection probability that each trade flow data comes from inter-industry trade (or equivalently from intra-industry trade). It measures the extent to which a given set of observations is explained by the inter-industry trade regime (or the intra-industry trade regime). The Heckman two-step procedure is used: a probit model is fitted first to a separation indicator, and then the estimated parameters are incorporated into the unconditional probability equation for the second stage estimation. The sample selection model requires an auxiliary separation indicator to partition the sample, so that each of its elements may match up with either comparative advantage or product differentiation with scale economies. As it is a selection criterion based on “empirical regularities†for separating intra-industry trade from inter-industry trade, the regime selection probability can improve upon the GL index as a relevant indicator of intra-industry trade. It can also be used to infer a transition in trade patterns, since a change in its value indicates how a shifting of explanatory power from comparative advantage to product differentiation takes place.

Suggested Citation

  • Honggue Lee, 2004. "Regime Selection as an Alternative to the Grubel-Lloyd Index," Econometric Society 2004 Far Eastern Meetings 491, Econometric Society.
  • Handle: RePEc:ecm:feam04:491

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    Cited by:

    1. Erlinda M. Medalla & Jenny D. Balboa, 2010. "Prospects for Regional Cooperation between Latin America and the Caribbean Region and the Asia and Pacific Region: Perspective from East Asia," Working Papers id:3129, eSocialSciences.

    More about this item


    Intra-industry Trade; the Grubel-Lloyd Index; Sample Selection;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • C34 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Truncated and Censored Models; Switching Regression Models
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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