On the Measurement of Intra-Industry Trade

Intra-industry trade accounts for over 60% of total trade in most developed market economies. Therefore, accurate measures of intra-industry trade can give an indication of the importance of determinants of international exchange other than relative factor proportions. Moreover, adjusting trade expansion may be easier when the expansion is in intra- rather than inter-industry trade. In testing these issues, the major barrier to accuracy is the unknown influence of categorical aggregation, which occurs when industrial categories are misclassified. Therefore, the 3rd digits of the Standard International Trade Classification or the Standard Industrial Classification are explored to assess the influence of this barrier. Uncritical use of these measures, however, can be hazardous because there is no way of knowing what kind of impact the phenomenon is exerting. There are 3 ways in which the influence of aggregation bias can be established: 1. measurement at a lower level of statistical aggregation, 2. measurement according to alternative classification systems, and 3. computation of an adjusted aggregation index.