Edited by Daisuke Hiratsuka and Yoko Uchida
David Hummels and Laura Puzzello INTRODUCTION 3.1 Why do countries trade intermediate inputs? Recent studies have documented that trade in intermediate inputs is a large and growing fraction of overall trade.1 With this documentation has come an increasing interest in explaining why this trade takes place and whether it is in important ways different from trade in final goods. For example, input trade may be driven by factor endowment differences (as in Arndt, 1997, 1998; Deardorff, 2001a, 2001b), by the balance of scale economies versus trade costs (as in Krugman and Venables, 1995, 1996; Venables, 1996), by multinational firms seeking to trade specialized inputs on an intra-firm basis (as in Helpman, 1984; Zhang and Markusen, 1999; Venables, 1999). Many of these motivations and explanations simply borrow theoretical determinants from the larger literature on trade in final consumer goods. We extend a standard model of international trade with intermediate inputs. This model, originally due to Krugman and Venables (1995, 1996), is widely used in literatures on international trade and agglomeration economies. It assumes a strong form of symmetry between intermediate and final goods: the sensitivity of a good’s demand to relative prices and trade costs is assumed to be independent of its ‘end-use’. We derive an implication that, for a given industry, the input share of bilateral trade depends exclusively on the industrial absorption share of intermediates from that industry. That is, the intermediate input share of bilateral trade in an industry should not be explained by factor and trade costs...
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