Economic Development, Vertical Intra-Industry Trade and Gains from Trade

Abstract

This paper investigates the impact of economic development on international trade and sources of gains from trade based on a theoretical model that considers consumers' preference diversity for quality and economies of scale in production. We confirm that both the volume of trade and the share of intra-industry trade increase with increases in the level of economic development in the region. We also find that the intra-industry trade share increases as the technology levels of the two countries become similar. Additionally, we find that both countries can gain from trade and that those gains come from three sources: internal economies of scale, more consumption, and more variety of goods.

International Trade Effects: Lower Cost or Higher Quality?

“…In spite of its prevalence, and in contrast with horizontal IIT, the exact effects of VIIT on firms' choices have yet to be clearly explained (Fontagné et al, 2006). Niem and Kim (2014) employ the model of Wauthy (1996) to examine effects of VIIT, but only in the short-run with only two firms and fixed quality levels of their goods. This model shows that VIIT effects are mainly on the cost reduction of goods.…”