Models of International Trade in Differentiated Goods

Abstract

It takes only casual observation to realise that a great deal of international trade is carried out among the industrialised countries. As reported by the World Bank in its 1994 World Development Report, 63 per cent of all exports from the developed countries in 1981 had as their destination markets of industrialised countries. A little research would further reveal that the bulk of this trade is within, rather than between, industries. The UK exports and at the same time imports cars from Germany, France, Italy, the USA and other industrial countries. This is an example of intra-industry trade. Refrigerators, television sets, radios — you name it — are also traded back and forth. While intra-industry trade is predominantly observed among high-income countries,¹ it also shows up and is perhaps of increasing importance in the trade relations of developing countries.²