The measurement of intra-industry trade between unequal partners

This note argues that the inadequacy of the GL index to correctly reflect the level of intra-industry trade in presence of trade imbalances may partly be due to measuring intra-industry trade between countries with large differences in economic size. Several adjustment procedures have been suggested in the literature but it is demonstrated that none of the alternative measures seem capable of eliminating the problem. A new measure of intra-industry trade is proposed in which the bilateral level of intra-industry trade is divided by the total number of products traded between two countries to yield an average level of intra-industry trade per product. This measure may also be applied at industry level, and in contrast to the GL index, it is highly correlated with the actual level of intra-industry trade.