Economic Development, Vertical Intra-Industry Trade and Gains from Trade

Abstract

This paper investigates the impact of economic development on international trade and sources of gains from trade based on a theoretical model that considers consumers’ preference diversity for quality and economies of scale in production. We confirm that both the volume of trade and the share of intra-industry trade increase with increases in the level of economic development in the region. We also find that the intra-industry trade share increases as the technology levels of the two countries become similar. Additionally, we find that both countries can gain from trade and that those gains come from three sources: internal economies of scale, more consumption, and more variety of goods.