Global Trade and Economic Growth

This assignment analyzes the significance of global trade and its influence on economic growth. It examines how globalization encourages international trade, leading to increased economic activity. The report delves into the concepts of intra-industry and inter-industry trade, highlighting the role of comparative advantage in driving economic growth. The Heckscher-Ohlin Model is used to demonstrate how trade can foster innovation and resilience against economic fluctuations. Additionally, the assignment explores the relationship between diverse economies and their engagement in intra-industry trade using the Grubel-Lloyd (GL) index.

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International trade
Name of the student
Name of the University
Author note

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Table of Contents
Introduction:...............................................................................................................................3
Heckscher-Ohlin Model and Intra-Industry Trade:....................................................................4
Inter Industry Trade and Intra Industry Trade Structure:.........................................................10
Conclusion:..............................................................................................................................12
References:...............................................................................................................................14

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Introduction:
Globalisation encourage countries to trade with different nation and boundaries, as
international trade is one of the foremost element in macro economics which enables
countries to achieve optimum level of economic growth. At present, several forces makes
globalisation more complex with billion of daily transaction which takes place every passing
year, at the same time these forces comes into account of economic, legal political,
technological and even cultural in our everyday lives. Another pivotal aspect of globalisation
in economics is opening of cross-borders and free trade which stimulates the stability and
growth of countries. The word “inter-trade” and “intra-trade” basically similar words but they
have different meanings. In international economics the word inter-trade industry refers to the
country trade which is carried out in different industries it is typically know as one-way trade
in sector. On the other hand, in intra-trade industry trade takes place within industries, in
other words country export and import goods in same industry it is also called two-way trade
which means country is importing and exporting same or similar goods. Generally, intra-trade
industry is more productive in technological success than inter-trade industry. Countries with
diverse economy and capital tend to engage more in intra-industry trade. It is calculated by
Grubel-Llyod (GL) index:
Where,
 X is export of a country
 M is import of a country
 i is industry.

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For instance, if a country is only importing and exporting goods X i.e. Rice then GL
index for that specific sector will be Zero “0”. On the contrary, if a country import and
exports same amount of goods X then it is likely to have 100 of GL index of that particular
sector. To illustrate, Korea is another example of intra-trade as it exports and imports cars in
particular level. Intra-trade provides wide range of benefits by offering trade and engaging
countries through businesses. (tutor2u, 2016)
Countries having strong economy and rapidly industrialized markets opt to choose intra-
industry trade because they have capabilities to produce easily different variates of products.
However, developing countries or rich resource nations have slightly less intra-industry trade.
There are enormous benefits of intra-industry trade as compare to inter-industry trade. Let’s
discuss some of them in detail. Firstly, it enables to accelerate the diversity of products within
the same industry which is benefited by both i.e. businesses and consumer. At present, intra-
industry result is seen everywhere in markets, as the huge product range is easily
differentiated from the same industry moreover, it provide opportunities of having a broad
range of differentiated commodities of trading partners in market. Another intra-trade
industry benefit include the opportunities for business by using comparative advantage
followed by, it also benefited to economies of scale. To elaborate, countries having
comparative advantage can earn more economic growth if they entirely focus on producing
particular goods within their limit rather than engaging themselves for the production of
complete range of particular products. Lastly, it brings innovation in industries by helping
economies to cope-up in short-term fluctuation in the country. (Dudovskiy, 2012)
Heckscher-Ohlin Model and Intra-Industry Trade:
This model is developed by two renowned Swedish economists namely “Eli
Heckscher and Bertil Ohlin”. This model has a great impact on problems of international
trade and on general equilibrium level. According to this model countries should export those

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products which are in huge quantities, at the same time countries import those specific
products for production which are inadequate in particular country. Trade takes place among
various countries throughout the world through its comparative advantage. Let’s take
example of china, it moved forward from labour intensive to capital intensive products now it
exports advanced technological products, as this country has comparative advantage in these
products. International trade on the other hand because of comparative advantage provide
benefit to particular industries and may have some negative impact on other industries.
Lastly, international trade enables countries to have uniformed price among them.
(ECONOMYWATCH, 2010)
The above chart shows the group of countries of the year 2011. As we can see Hong
Kong accounted for highest intra-industry trade (IIT). Singapore with 65 followed by USA 62
and EU 60 respectively. Hence, we can say that developed countries have relatively high
intra-industry score, as compare to poor countries such as:, Zambia and Central African
Republic which have the lowest figure of 17 and 2 in world.

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The table 4.1 shows the inter-trade industry relationship between Japan and USA in
the year 1999. As we all know that comparative advantage determines the inter-trade industry
of different countries. From the above chart it is clearly visible that Japan in 1999 has the
inter-trade industry and has comparative advantage in comparison with USA. In 1999 Japan
suddenly changed its pattern of exports towards transportation and industries while imports
fuel, raw material and food. In today’s international trade inter-trade industry is not the
complete story. Many countries frequently tend to imports and exports in same industry. It
basically depends upon the preference of choices or variety within the countries which
influence the intra-trade industry.

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Another example is Inter-industry and intra-industry trade within the European Union
Nowadays, EU show a considerable increase inter-industry and intra-industry trade.
According to this can show that EU has become interested in trading with another countries
rather than one-way trade. For example, internal imports and exports figure
37% in total trade in 1958. By 1992 international trade had overall 60 and 60% in all
international trade operations. The major strength contributing to this rose is the enlargement
of the European Union. Trade within the EU from shipments was calculated at 2,194,341
million euros in 2009. This number was more than double that of trade with non-EU
countries. Now, it has been a common phenomenon that higher export of individual trading
country has become an important part of the internal market. Luxembourg, Slovakia and
Czech Republic were recorded as the highest shares of intra-EU trade on the other hand
United Kingdom,
Malta and Italy were recorded as much lower. As we can see on the table below:

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The global economic crisis that start in US in 2007 can be the important reason of
this change which is intra-EU trade decreased in 2009 even more highly contrast with the
exports also within a short time spread to all EU Member States. Moreover, the cause of the
post-World War II economic crisis in the years 2007-2010 was the case in Latvia, Lithuania,
Estonia and Finland, with a 30% this is the lowest intra-EU trade. The inter-industry trade
between the countries in the European Union depend on the general theory, violence factor
and supporting factors. In other words European countries expert in producing those products
which have comparative advantages and then traded to the local market for products they find
that hard to produce due to lack of materials or skilled. Followed by countries with the
highest trade surplus in 2009 was Germany at 134,780 million euros following with
Netherlands 39,244 million Euros, and Ireland 37,753 million euros. Nevertheless, in the
same time some countries face a deficit as well, such as United Kingdom was recorded as the
highest trade deficit of EUR 93,189 million euros. Internal trade within the EU is particularly
liquid. These can be divided into two categories - vertical differences and horizontal
differences.
Vertical means the difference in product quality, differentiation in Quality and
Usability or is the product of the difference, from the outset; there are some types of
miscellaneous items that can be bought at the source. Fourth, most of the sales are in the form
of goods that are compatible or need to be used together, while horizontal refers to the
difference in product characteristics. This requirement is necessary in the context of EU
consumers in the last decade to need different products than differentiated products. The
industry as an inter-industry trade became inductive over intra-industry trade due to its
emphasis on horizontal planning rather than vertical. However some countries are very
successful in vertical planning. It depends on the quality of the operation, such as Portugal,
Greece and Finland. In conclusion, one of the reasons for the expansion of the EU industry is

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the supporting of international trade among member countries which is much beneficial to the
EU. The following example is Trade liberalization of Thailand and China under the ASEAN-
China Free Trade Agreement Free Trade Area).
There are 7,000 items in the Normal Track program. Rental vehicles July 20, 2005,
resulting in many Thai products, especially the industrial goods, benefited from trade
expansion and the decline in raw material costs. It is noted that considering the trade structure
this is the first time that it is a trade within the same industry; (Intra-Industry Trade),
especially in machinery. Components and parts include electrical and electronic components,
electronics, and automobile, which is Thailand and China has exported and imported the
goods in such a group. For instance, major export products of Thailand to China include:
machinery and computer which is vertical Intra-Industry Trade. Therefore, the reduction of
import tax rates is not significantly competitive but it is more supportive. On the other hand,
Thailand can also import machinery and computers from China cheaper than the past.
Moreover, Thailand also exports auto parts, cars, chassis, trucks, and trailers to China, while
major Chinese imports include motorcycles, tractors, trailers and bicycles. Due to China's
technological development level may not be high compared to Thai manufacturers.
Meanwhile, Thai motorcycle manufacturers are benefiting from the cost of importing parts
from China. As most of the major industrial goods traded, they are more of a complementary
product than a substitute product. However, liberalization is just beginning. The impact on
the trade structure may not be severe, but in the future if the level of liberalization is higher
while the structure of the industry is likely to change according to the development of each
country. At that time the impact of liberalization on the structure of trade may be different,
which is closely monitored.

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Inter Industry Trade and Intra Industry Trade Structure:
Till now various scenario of inter and intra industry trade has been discussed, but when it
comes to the theoretical background of the study, then we have to perform the literature
review for inter industry trade and intra industry trade structure. In the era of 21st century it is
true that international trade is important for every nation and without trading none can
flourish. International trade allows the economies to flourish and provide stimuli to the
productivity of the country. For instance, it has been seen that GDP of the Vietnam has rose
by 4.5% in the year 1990, once the country indulged itself into the trading. Besides this,
trading has helped the country to produce more jobs that effectively reduced the
unemployment level of the country by 66%. Thus, it is true that trade has huge amount of
influence over the economic performance of a country.
Well, now what about the trade theory! Previously in this report Heckscher-Ohlin Model has
been discussed, where we focused on the facts that why trade occurs and how the trade path
for the world economy was till recent years. Now, let us focus on the type of trade that took
place among countries or in the case of industries too, irrespective of their place and mode of
operation. According to the economists, countries or firms indulge themselves into two
different types of trade, which are namely inter industry trade and intra industry trade. Both
of them took place among the countries and they have different characteristics. According to
Kim (2017), inter industry trade is international exchange of differentiated products, where as
intra industry trade is the trade of intermediate goods and differentiated goods. In the case of
continuous export and import of similar types of goods and services, intra industry trade
comes into existence. According to the Crescenzi, Gagliardi and Lammarino (2015) both the
intra industry and inter industry originate from the competitive advantage in the production of
goods and services. For instance, 27 countries of the European Union has exported more than

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30% of their total export through the intra industry trade and it showcase that the economy
has highly correlated with each other (Johnson 2014).
According to the above figure, it can be seen that Czech Republic has the highest share of
intra industry trade and United Kingdom has the lowest share of intra industry trade. During
the recent decades there has been substantial rise in the internal trade among the European
countries and the countries like US, Australia and others. According to the statistics, during
1958 to 1992, international trade totalled for 60 to 61% of the total trade value through the
inter and intra industry trade (Kösekahyaoğlu 2015). These figures showcase that the
community has become more focused on trading commodities, among the trading partners
rather than non trading partners. According to the David Ricardo’s theory of comparative
advantage, countries which has more efficiency in production of one good, it is beneficial for
that country to export those goods and services and import those goods, in which the country
does not have competitive advantage. By the means of this trading, both the trading partners
can better off each other. Another instance of the inter and intra industry trade can be seen
between the China and European countries. Both the European countries and China are the
growing industries that have cannon balled the economy since 2006. With their high amount

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of export these countries has become one the largest exporter around the world (Greenwood
2017). Moreover, if the statistics of the export of these countries can be analysed, then it
would be found that these countries are highly indulged in their inter and intra industry state.
China exports 15% of their goods and services, to the European countries and this showcase
the level of integration that these counties posses (Pollack 2015). However, with the china’s
shift towards New Normal, has effectively reduced the inter industry trading among them.
Well, it can be said that, this rise in inter and intra industry trade among these countries has
grown substantially due to their interdependence and as the magnitude of the business rises
between the countries, share of intra and inter industry trade will rise (Kösekahyaoğlu 2015).
Conclusion:
Trade is an important phenomenon of every economy. Without trade, countries cannot grow
and achieve new goods and services. Since the early ages trading has started and over the
time it is growing day by day. This report has studied the importance of trade and it has
found that globalisation encourage countries to trade with different nation and boundaries, as
international trade is one of the foremost element in macro economics which enables
countries to achieve optimum level of economic growth. The report has found that presently
globalisation makes the trading more complex and various factors like economic,
technological, political and cultural lives are being influenced highly with the introduction of
trade. The report has focused mostly on the intra and intra industry trade among the countries
and it has found that countries having comparative advantage can earn more economic
growth if they entirely focus on producing particular goods within their limit rather than
engaging themselves for the production of complete range of particular products. Utilizing
the Heckscher-Ohlin Model the report has found that, intra and inter industry trade brings
innovation in industries by helping economies to cope-up in short-term fluctuation in the
country. The report has found export and import goods in same industry acknowledged as the

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two-way trade will help the countries to grow. From the literature review, the report has
found that intra-trade industry is more productive with the technological success than inter-
trade industry. Using the Grubel-Llyod (GL) index, Countries with diverse economy and
capital tend to engage more in intra-industry trade. Besides this the report has analysed the
present situation of the various countries that highlights the integration among the various
economies. To conclude, the report states with rise in business between the countries inter
and intra trade rises and it will aid the economy to sustain in long run.

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References:
Crescenzi, R., Gagliardi, L. and Iammarino, S., 2015. Foreign multinationals and domestic
innovation: Intra-industry effects and firm heterogeneity. Research Policy, 44(3), pp.596-609.
Dudovskiy, J., 2012. Inter-industry and intra-industry trade. Heckscher-Ohlin Model.
[Online]
Available at: https://research-methodology.net/inter-industry-intra-industry-trade-heckscher-
ohlin-model/
[Accessed 20 january 2018].
ECONOMYWATCH, 2010. Heckscher-Ohlin Model Overview. [Online]
Available at: http://www.economywatch.com/international-trade/heckscher-ohlin-model.html
[Accessed 20 january 2018].
Greenwood, J., 2017. Interest representation in the European Union. Springer.
Johnson, R.C., 2014. Five facts about value-added exports and implications for
macroeconomics and trade research. Journal of Economic Perspectives, 28(2), pp.119-42.
Kim, I.S., 2017. Political cleavages within industry: firm-level lobbying for trade
liberalization. American Political Science Review, 111(1), pp.1-20.
Kösekahyaoğlu, L., 2015. Does Trade Liberalisation Matter?: An Analysis of Intra-Industry
Trade for Turkey and the EU. Avrupa Araştırmaları Dergisi, 10(1), pp.113-135.
Pollack, M.A., 2015. Policy-making in the European Union. Oxford University Press, USA.
tutor2u, 2016. Intra-Industry Trade. [Online]
Available at: https://www.youtube.com/watch?v=Twtj76Z2vgc&t=209s
[Accessed 20 january 2018].

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