Vertical intra-industry trade and factor proportions

This paper explores the nature of vertical intra-industry trade: the exchange of an intermediate good and a final good that requires the intermediate good in the same industry. A factor endowment model is extended to a setting with a technological difference in the production of the intermediate good between countries. Unlike the result of the existing work, the share of intra-industry trade does not reach a peak when countries have identical factor endowment ratios. This paper shows that a difference in factor intensities between intra-industry goods plays a crucial role in deriving this result.