Intra-Industry Trade of Transition Countries: Trends and Determinants

Abstract

This paper analyzes trends in different components of trade of transition countries. To explain the cross-country differences, the paper points out the important distinction between the determinants of inter-industry trade and intra-industry trade (IIT), and horizontal and vertical IIT. Using varieties of gravity models, it is shown that variables from Increasing Returns Trade Theory, such as scale economies, similarity of income levels, and number of varieties produced play important roles in IIT, especially in horizontal IIT, whereas factors such as comparative advantage, dissimilarity in income levels, and having more developed trade partners of Heckscher-Ohlin Trade Theory are crucial in determining inter-industry trade and vertical IIT to a lesser degree.

Keywords: Vertical and horizontal intra-industry trade, transition countries, gravity models

JEL Classification: F14, P2