Trade Theory. Krugman argues that economies specialise to take advantage of increasing returns, not following differences in regional endowments (as contended by neoclassical theory). In particular, trade allows countries to specialize in a limited variety of production and thus reap the advantages of increasing returns (i.e., economies of scale), but without reducing the variety of goods available for consumption. Yet, Donald Davis believed that both the Heckscher–Ohlin and Ricardian models were still relevant in explaining intra-industry trade. He developed the Heckscher-Ohlin-Ricardo model, which showed that even with constant returns to scale that intra-industry trade could still occur under the traditional setting. The Heckscher-Ohlin-Ricardo model explained that countries of identical factor endowments would still trade due to differences in technology, as this would encourage specialisation and therefore trade, in exactly the same matter that was set out in the Ricardian model. Types There are three types of intra-industry trade Trade in Homogeneous Goods. Trade in Horizontally Differentiated Goods. Trade in Vertically Differentiated Goods. Although the theory and measurement of intra-industry trade initially focused on trade in goods, especially industrial products, it has also been observed that there is substantial intra-industry trade in the international trade of services. Measurement Intra-industry trade is difficult to measure statistically because regarding products or industries as "the same" is partly a matter of definition and classification. For a very simple example, it could be argued that although a BMW and a Ford are both motor cars, and although a Budweiser and a Heineken are both beers, they are really all different products. Various indexes of IIT have been created, including the Grubel–Lloyd index, the Balassa index, the Aquino index, the Bergstrand index and the Glesjer index. Research suggests that IIT is not simply a fiction or artifact produced by statistical classifications and definitions, but very much a reality. the share of IIT in total international trade is growing all the time, at about 4–5% a year. Thus, more and more, countries are importing the same kinds of products they are also exporting. "Intra-industry trade has been considered in international trade literature as the explanation of the unexpectedly large expansion of industrial trade among OECD countries, for which it represented more than two-thirds of their total international trade by the beginning of the seventies." See also Inter-industry trade Marginal intra-industry trade References International trade