Production Structure in the Context of International Trade

This paper deals with the recent empirical phenomenon of intra-industry trade, i.e., trade in similar goods between similar countries. It treats this phenomenon from the point of view of the theory of the structure of production, highlighting the importance of the sequential nature of production and the heterogeneity and specificity of factors of production, as developed by Carl Menger, Eugen von Böhm-Bawerk and their followers of the Austrian School of economics. The reader is first exposed to the historical development of production and capital theory. A simple theory of production structure, along the lines of Austrian economics, is afterwards presented and a useful tool for the analysis of intra-industry trade is developed. In the following discussion of existing theories of intra-industry trade, we make the case for vertical intra-industry specialization, complex manufactured goods and sliced-up production chains across countries. The reader immediately observes the importance of Austrian production structure theory for the analysis of intra-industry trade. We accordingly apply the concepts of the structure of production to intra-industry trade and analyze, in particular, the time- and place-aspects of international production. The concluding section shows the relevance of our approach to intra-industry trade for the analysis of business cycle synchronization across countries, and for the optimum currency areas theory.