This paper extends the reciprocal dumping model of trade to a general equilibrium theory. We merge the Cournotian model of Brander (1981) with the Ricardian model of Dornbusch, Fischer and Samuelson (1977). In this Cournot-Ricardian model, we find that the share of intra-industry trade in total trade increases with a similarity between trading partners, where the similarity is measured in terms of the industrial distribution of labor productivities. Thus our model provides another micro-foundation to the general finding that the share of intra-industry trade is high when the trading partners are at a similar level of development. We also put this new model to a test. Using the data on trade and productivity, we find that the industrial distribution of labor productivities has significant explanatory power over the variations of intra-industry trade across country-pairs. This new variable seems to perform as well as the more popular variable, such as factor proportion, in explaining the share of the intra-industry trade. (The rest is omitted.)

Executive Summary

I. Introduction

II. The Model

III. Empirical Investigation

IV. Conclusion

References