Country size, income level and intra-industry trade
This study investigates three testable hypotheses of intra-industry trade. It begins by developing a theoretical, two country model. The model explicitly includes two goods: differentiated products and homogeneous goods. Then three empirical hypotheses are derived as follows. The share of intra-industry trade will be large: (a) if the two economies are of similar size, (b) if the capital-labour endowment ratio of both countries is similar, and (c) if the total size of the two economies is large. From the cross-sectional analysis using 1970-1994 data, results are obtained that support the model. Furthermore, the results are confirmed using panel analysis on the pooled data.