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Intra-Industry Trade: The

Pakistan Experience
Muhammad Shahbaz
and Nuno Carlos Leito

Introduction
Empirical work done on IIT has mostly focused
on developed countries.
Trade between developed and developing
countries is usually explained by comparative
advantage or the H-O model.
The study tests the determinants of IIT
between Pakistan and its main 10 trading
partners using an unbalanced panel from
1980 to 2006.

The trading partners include
United States
United Kingdom
Japan
Germany
Saudi-Arabia
Canada
France
Italy
Netherlands
Norway

Vertical vs. Horizontal IIT
In the international trade literature, a distinction
is made between vertical and horizontal
differentiated IIT.
This distinction is important to make because
there are different theoretical underpinnings and
determinants applicable to each type of IIT
(Greenaway et al., 1995).
Vertical IIT relates to two-way trade of different
varieties of quality products (Falvey, 1981; Shaked
& Sutton, 1984).
Horizontal IIT refers to two-way trade of similar
quality products with different attributes.


Methodology
The Grubel and Lloyd (1975) index is used to
measure the level of IIT:


The index is equal to 1 if all trade is of the IIT
type; if the index is equal to zero all trade is of
the inter industry type.

Data Source:
Explanatory variables: World Bank, World
Development Indicators 2008
Dependant variables: Federal Bureau of Statistics
(FBS)
The model is specified as follows:


The authors use the fixed effects model for
estimation. The explanatory variables have
been chosen in accordance with the theory.

Economic differences between countries
(DGDP): this is difference in GDP between
Pakistan and its partner country. The literature
reveals both positive and negative signs.
MinGDP: this is the lowest value of GDP per
capita between Pakistan and the partner
countries
MaxGDP: this is the higher/highest value of
GDP per capita between Pakistan and the
partner countries
DIM: the average of GDP per capita between
Pakistan and the partner country.
DIST: this is the geographical distance
between Pakistan and the partner country.
TIMB: it is the trade imbalance between
Pakistan and country j. It represents net trade
as a share of total trade and ranges from 0 to
1. Empirical evidence suggests a negative sign.
FDI: stands for foreign direct investment. The
sign is ambiguous.
Results

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