Differences in GDP Per Capita and the Share of Intraindustry Trade : The Role of Vertically Differentiated Trade

This paper examines the relationship between per capita GDP differences and bilateral intraindustry trade shares. The relationship is negative in OLS regressions but positive in fixed-effect regressions, and evidence is presented suggesting this is due to the presence of vertically differentiated trade. The paper begins by distinguishing between vertically and horizontally differentiated trade, and then finds a positive and significant relationship between GDP per capita differences and the trade shares only in the regressions on the vertically differentiated trade shares. It is shown also that the extent to which income distributions overlap affects only the share of vertically differentiated trade