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2001) 77 Bougheas, S. ; (1997), p. 170 The Relationships between Transport, Trade and Economic Growth 41 Vertical Specialization According to Ishii and Yi (1997) vertical specialization represents an important factor by which lower trade barriers and transportation costs explain the growth of world trade. Vertical specialization splits up the production process into several stages, so that a good crosses various borders before it reaches its final destination. As for horizontal specialization, the underlying causes are either comparative advantage or increasing returns to scale.

The two economies are allowed to engage in intra-industry trade in differentiated intermediate inputs. – There are no international flows of ideas. Trade facilitates technological progress In this setting, international trade does not alter the incentive to engage in research, and subsequently has no impact on the economy’s rate of growth. This is due to the fact that that the number of varieties of final goods in each economy is the same as prior to trade. But there is a level effect as the number of varieties of the intermediate inputs is increasing and thus raises the product of labor.

A major part of the studies examining the causes of the rapid growth of world trade shows that the increase in the 53 Transport costs are measured as the difference between CIF and FOB import prices. ; (2002), p. 5 The Relationships between Transport, Trade and Economic Growth export share of output is to be attributed to tariff barrier reductions. But in order to be able to draw this conclusion unrealistically high price-import elasticities need to be assumed. However, if transportation costs are included when studying trade expansion due to falling trade costs, trade expands more for a given elasticity.

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