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.