Intra Industry Trade NARRATOR: Today, we look at an important fact about international trade: the great prevalence and increasing importance of intra-industry trade. Here's a classic or paradigmatic example of what we typically think about, -- when we think about trade based upon comparative advantage: wheat and cane sugar. So, in this example, -- one country which has the comparative advantage in wheat; it exports wheat and it imports cane sugar. The other country produces and exports cane sugar and it imports wheat. Here's another paradigmatic or classic example, this one from Heckscher-Ohlin theory: jet aircraft and shoes -- or a high-skill, high-capital intensive good, and a low-skill, low-capital intensive good. Again, the key here is that one country exports -- the jets and imports the shoes. The other country exports the low-capital, low-skill good, the shoes, and it imports the high-skill, high-capital good, -- the jets. Now, when we actually look at the trade data, however, what do we see? Well, the paradigmatic example in the data, might actually be motorcycles. That is, one country exports these motorcycles, and imports these motorcycles, -- and the other country imports these and exports these. Now, that's a little peculiar, -- because, at first glance, these motorcycles look awfully similar. Why should one country be exporting one and importing the other and vice versa for the other country? And, yet, this intra-industry trade; -- trade based upon similar goods, where one country is both exporting and importing the same good or a similar good; turns out to be very common. This intra-industry trade is what this lecture is all about. So, intra-industry trade is the share of trade that is within or intra the industry -- rather than across sectors. It's typically measured by the Grubel-Loyd index or other indexes, but this one is the one which is most common. Let's show how this Grubel-Loyd index works. Let's first, here, the top is the absolute value of exports minus imports divided by the sum of exports and imports. So, for example, suppose there's a good which a country exports, but does not import. Well, then imports are going to be 0; -- this number is going to be 1. 1 minus 1 is 0. So, in that case, intra-industry trade would be 0. That is, if we have a good which we export but don't import, -- intra-industry trade, as measured by the Grubel-Loyd index, will be 0. Same thing if there's a good for which we import, -- but we don't export it. On the other hand, suppose that exports equal imports. So, we have a good for which -- the number of exports is about the same as the number of imports, then this is 0 and this is 1. So, the Grubel-Loyd index for a good which we both export and import would be equal to 1. So, let's give some examples. So, in 2010, the U.S. exported 170 million dollars worth of raw sugarcane and it imported 1.9 billion dollars of raw sugarcane. So, this is the case where we import a lot of the good and export hardly any at all, so we should have a number which is close to 0, -- and, in fact, when you do the calculation, you find that for cane sugar the Grubel-Loyd index is -- .164. In other words, there's not very much intra-industry trade. On the other hand, what about motorcycles? Well, in 2010, -- the U.S. exported about a billion dollars worth of motorcycles -- and we also imported about a billion, actually 1.2 billion worth of motorcycles. So, if you calculate the Grubel-Loyd index, what you find is that it should be close to 1 and, in fact, it is. It's .909. [ENDS AT 4:13]