Product Quality Index: A New Way to Classify Intra-industry Trade

Abstract

The increasing intra-industry trade (IIT) gives an impetus to theoretical foundations of new trade theories. For the empirical assessment, the measurement and segregation of IIT become very essential. On the basis of quality of product, IIT is segregated into two parts. First is based on qualitative differentiation of the products known as vertical IIT (VIIT) and the second is based on the differentiation of the products called as horizontal IIT (HIIT). The work of Greenaway, Hine, and Milner (1994, Weltwirtschaftliches Archiv, 130(1), 77–100), Fontagné and Freudenberg (1997, Intra-industry trade: Methodological issues reconsidered, Paris: Centre d’Études Prospectives et d’Informations Internationales) and Azhar and Elliott (2006, Review of World Economics, 142(3), 476–495) are some of the milestones in the methodological development of IIT. However, these methods are not free from certain shortcomings. Thus, the article attempts to extend the measurement technique with product quality index (PQI) to overcome the existing shortcomings such as arbitrariness of dispersion limit and bias in the classification of IIT into HIIT and VIIT. JEL Code: F140