Article

The Measurement of Intra-Industry Trade between Unequal Partners

Weltwirtschaftliches Archiv 02/1997; 133(3):554-565. DOI: 10.1007/BF02707503
Source: RePEc

ABSTRACT

This note argues that the inadequacy of the GL index to correctly reflect the level of intra-industry trade in presence of trade imbalances may partly be due to measuring intra-industry trade between countries with large differences in economic size. Several adjustment procedures have been suggested in the literature but it is demonstrated that none of the alternative measures seem capable of eliminating the problem. A new measure of intra-industry trade is proposed in which the bilateral level of intra-industry trade is divided by the total number of products traded between two countries to yield an average level of intra-industry trade per product. This measure may also be applied at industry level, and in contrast to the GL index, it is highly correlated with the actual level of intra-industry trade.
In studies of intra-industry trade, one should cautiously interpret the GL index since it may give a false picture of the extent and the volume of intra-industry trade. If the standard GL index is used, it is suggested that also alternative measures of intra-industry trade are employed to complement the GL index in order to correctly observe the true extent of intra-industry trade.

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    • "Furthermore, we have no theoretical a priori indication as to which measure is best. Finally, Rajan (1996) and Nilsson (1997 and 1999) argue that, in general, the degree of intraindustry trade, as measured by the GL index, is a poor indicator of the level of intra-industry trade. This also appears to be the case with the indices and shares reported in Table 1. "
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    • "In an example of Germany ' s intra - industry trade with 20 developing countries in 1990 , Nilsson ( 1997 ) shows that the correlation coefficient between the proposed measure in ( 8 ) and the level of intra - industry trade is high ( 0 . 96 ) , revealing that intra - industry trade per product is a suit - able proxy for the level of intra - industry trade . "
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