Mudassar RASHID*, Javeria SARWAR**, Muhammad Abeer FAROOQ***
Intra-industry trade has a paramount value in the theory of international trade due to the reason that it establishes the base for exploiting economies of scale and product differentiation, which ultimately ensures the existence of comparative advantage. The current research is an endeavour to examine the determinants of intra-industry trade through Augmented Gravity Equation (AGE) and the potential of intra-industry trade through revealed comparative advantage (determined by the Balassa index); in the selective industries of Pakistan, with its top eleven trading partners. For this purpose, the top five exporting industries of Pakistan are selected which include textile and clothing, agro-food, engineering goods and manufacturing goods, leather and minerals and metals. Data for the period from 2003 to 2016 is used for analysis. The random effects panel data model is used to estimate the independent factors of IIT such as the difference in market size, the difference in per capita income, common border, economic distance, and free trade agreement. The results calculated through AGE mainly showed that the difference in market size and per capita income significantly alter the course of IIT in Pakistan due to variations in the development stage between Pakistan and its trading partners. Further, the RCA showed the highest trend in the textile and clothing industry and the lowest in the transportation industry of Pakistan. Finally; it is suggested that in Pakistan, innovative and differentiated goods are required to be produced to attain economies of scale and capture international markets. In this way, its balance of payments can be improved.
Keywords: Intra-Industry Trade, Augmented Gravity Equation, Revealed Comparative Advantage, Balassa Index.