A comparison of specialisation gains from trade in in final and intermediate goods
| Date | 01 August 1997 |
| DOI | http://doi.org/10.1111/j.1467-9485.1997.00059.x |
| Author | Chris Milner,Scott McDonald |
| Published date | 01 August 1997 |
II
NTRODUCTION
Empirical studies on the gains from trade tend to concentrate on the effects of
changes in trade in final goods or outputs, however a substantial proportion of
the post war increase in trade is accounted for by growth in trade in intermediate
goods or inputs. In this paper, we seek to demonstrate an empirical method for
comparing the specialisation gains which derive from trade in intermediates
with those from trade in final goods, using a vertically integrated sector (VIS)
modelling approach and UK data. This approach allows us to identify differ-
ences in both the direct and indirect factor input requirements with and
‘without’ each type of trade, that is to estimate the difference in the resources
actually required by exports to acquire imports (with trade ) and those that would
be required if imports had to be substituted for or replaced by local production
(without trade). The resulting measure is one therefore of the potential
© Scottish Economic Society 1997 298
*University of Sheffield
**University of Nottingham
Scottish Journal of Political Economy, Vol. 44, No. 3, August 1997
© Scottish Economic Society 1997. Published by Blackwell Publishers Ltd, 108 Cowley Road, Oxford OX4 1JF, UK and
350 Main Street, Malden, MA 02148, USA
A COMPARISON OF SPECIALISATION GAINS
FROM TRADE IN FINAL AND INTERMEDIATE
GOODS
Scott McDonald*and Chris Milner**
ABSTRACT
This paper sets out a method for measuring and comparing the specialisation
gains from trade in intermediate goods and final goods, based upon a vertically
integrated sectors (VIS) modelling approach. The factor input requirements of
domestic production to replace imported intermediates is compared with the
factor requirements of the ‘compensating’ exports required to purchase the
imports. This method is applied to the UK economy, using a 28 sector model
and a breakdown of factor inputs into land, labour and capital. Estimates of net
factor-usage or saving on individual factor (weighted for factor quality
differences) and multi-factor bases are reported. The results indicate that trade
in inputs and outputs was net labour-using, and net-capital and land-saving in
1979. The overall, or multi-f actor, gain from trade in intermediates was greater
than for trade in final goods in 1979, with overall resource savings of 3·01%
and 1·73% respectively.
specialisation gains from trade. This extends the methodology employed by
McDonald and Milner (1994 ) to final goods.
The remainder of the paper is organised as follows. Section II describes the
level and industry pattern of UK trade in intermediates and final goods, and
provides a conceptual framework for investigating the nature of the specialis-
ation gains from trade in inputs and outputs. Section III sets up the VIS
modelling framework and a methodology for measuring f actor input require-
ments and for measuring the gains from trade-induced f actor ‘savings’. The
results of the estimated individual factor effects and the net, or multi-f actor,
gains for input and output trade for the UK, using data detailed in Appendix A,
are then compared for the year 1979.1 These results are set out in Section IV.
Finally, Section V assesses the implications of the results and provides summary
conclusions.
II TRADE IN INTERMEDIATES AND FINAL GOODS
Table 1 sets out information on the sectoral patterns of production, consump-
tion, exports and imports of intermediate and final goods by commodities. Table
1 also includes details of the intermediate imports purchased by industries which
demonstrates the extent to which the VIS framework entails an alternative view
of productive activities. There are substantial differences, even at the level of
aggregation used in this study, in the commodity composition of domestic final
production and consumption and total imports. The image is blurred, however,
by the extent to which different commodities are tradable. An image reinforced
by the relative magnitudes and patterns of imports to final and intermediate
demand.
Imports to intermediate demand were some 60% greater than imports to final
demand, and demonstrated a tendency to be concentrated in resource intensive
products whereas imports to final demand were dominated by engineering,
vehicles and processed food (53% ). Similarly, there were substantial differences
between the patterns of domestic production and consumption and exports
which identify the relative importance of engineering, vehicles, oil and
chemicals to the UK in 1979. Overall the differences are consistent with
appreciable specialisation.
Before turning to the empirical approach adopted by this study to investigate
the relative magnitude of the gains from trade in final goods and in
intermediates, we briefly review the economic concepts under consideration and
the principle of gains from trade.
Let us use the dual approach to represent trading equilibrium for a small
(price-taking) distortionless economy with fixed factor supplies ( υ) and which
for simplicity has one consumer.2 The equilibrium conditions under autarky (a)
SPECIALISATION GAINS FROM TRADE 299
© Scottish Economic Society 1997
1Comparable results are available from the authors for 1984. We concentrate here on the
1979 results because of the potential distortions arising in 1984 as a result of the coal strike.
2We abstract therefore from the problems of potential compensation associated with the
distributional effects of trade.
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