On the Economic Relationship between Marginal Intra-industry Trade and Labour Adjustment in a Division of Labour Model

ON THE ECONOMIC RELATIONSHIP BETWEEN MARGINAL INTRA-INDUSTRY TRADE AND LABOUR ADJUSTMENT IN A DIVISION OF LABOUR MODEL In the context of Ethier’s (1982) division of labour model, this paper accomplishes three tasks. First, we complement existing literature on the algebraic properties of marginal intra-industry trade (MIIT) measures by embedding one of these measures in a general equilibrium model. Consistent with the existing literature, we find that change in the Grubel-Lloyd index provides systematically different economic information from change in the MIIT index. Second, we examine the connection between intra-industry trade and intra-industry adjustment. Here we find that the informal assumption that intra-industry trade generates only intra-industry cannot be sustained. That is, intra-industry trade will generally induce inter-industry adjustment. Finally, we find that, because intra-industry trade generates inter-industry adjustment, increased intra-industry trade will generally induce long-run changes in relative factor-prices. This suggests, given the prominence of intra-industry trade in the trade of OECD countries, that there may be some problems with inference on the link between trade and wages undertaken in a strict HeckscherOhlin framework. Mary E. Lovely Department of Economics Syracuse University Syracuse, New York 13244-1090 [email protected] Douglas R.Nelson Murphy Institute of Political Economy 108 Tilton Hall Tulane University New Orleans, LA 70118-5698 [email protected]