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Empirical Methods in International Trade

Essays in Honor of Mordechai Kreinin

Edited by Michael G. Plummer

Internationalization of the world economy has made trade a key factor in the growth potential of nearly every nation’s economy. Hence, economists have become increasingly interested in the determinants of international trade and competitiveness. Empirical Methods in International Trade captures the many aspects of this trend in globalization through practical techniques well-founded in economic theory. The authors, comprising some of the most influential applied international economists of their generation, use cutting-edge models to develop empirical approaches to critical aspects of economic interchange. These approaches are developed and explained carefully with the goal of making them accessible to a wide audience.
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Chapter 2: Measures of Similarity and Matching in International Trade

Peter J. Lloyd


* Peter J. Lloyd 1. INTRODUCTION Finger and Kreinin (1979) devised an index of ‘export similarity’ to calculate the overlap between the distributions of exports by commodity group of two countries to the markets of a third country. As they noted, ‘A number of propositions in international economics can be examined by the use of an index measuring the similarity of the exports of any two countries (or groups of countries) to a third market’ (Finger and Kreinin, 1979, p. 905). They specifically mentioned the situations of non-reciprocal preferences granted by developed countries to developing countries (and therefore not to other developed countries which also exported to the preference-granting country under consideration), the multilateral extension on an MFN (most-favoured-nation) basis of reductions in tariff rates agreed among the developing countries to developing countries, and the relationship between export patterns of two countries and the convergence or divergence of economic structure of the economies of these countries over time. Subsequently, the Finger–Kreinin (FK) index of export similarity has been used to compare the distribution of exports of two countries or country group by a number of other authors in a number of different contexts. Pomfret (1981) used the measure in a similar way to examine the impact of EEC enlargement on non-member countries’ exports to the EEC. More recently the Australian Productivity Commission (2002) used it to examine the impact of introducing free entry into Australian markets for all least developed countries. Xu and Song (2000) used the FK index of...

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