Intraindustry Specialization and the Gains from Trade

Several recent empirical studies of trade suggest that interindustry specialization and trade, which reflect the conventional forces of comparative advantage, are also accompanied by intraindustry specialization, which reflects scale economies and consumers' taste for a diversity of products. This paper develops a simple model which illustrates this argument. Two main results are developed. First, the nature of trade depends on how similar countries are in their factor endowments. As countries become more similar, the trade between them will increasingly become intraindustry in character. Second, the effects of opening trade depend on its type. If intraindustry trade is sufficiently dominant, the advantages of extending the market will outweigh the distributional effects, and the owners of scarce as well as of abundant factors will be better off.