Towards a more general measure of revealed comparative advantage variation

Abstract

The change of Balassa's ‘revealed comparative advantage’ index is often directly used to measure comparative advantage variation over time, yet the theoretical foundation of this traditional measure has not been clarified. In this article we derive a ‘revealed comparative advantage variation’ index, which turns out to be a more general measure of comparative advantage variation than the traditional one.

Notes

¹Balassa's RCA index is based on the general RCA approach, which in essence, is to use ex post specialization patterns to infer comparative advantage patterns, i.e. a country's actual high specialization in an activity can be viewed as an evidential indication that it has strong comparative advantage in that activity (Balassa, 1965). While a variety of RCA indices have been suggested and disputed (Baldwin, 1971; Donges and Riedel, 1977; Wolter, 1977; Bowen, 1983; UNIDO, 1982, 1985, 1986; Vollrath, 1991; Memedovic, 1994), Balassa's RCA index remains to be the most widely used measure by applied economists.

²Market share is a popular measure of export competitiveness in the literature (Richardson, 1971a, b; Bowen and Pelzman, 1984; Chen et al., 2000).

³It is ‘revealed’ (as opposed to actual) comparative advantage in that rather than reflecting a country's true comparative advantage, strong competitiveness or high specialization could be the result of policy interventions.

⁴ or is often used to reveal ‘comparative advantage’ or ‘comparative disadvantage’. Yet the label of ‘disadvantage’ may convey unnecessarily negative connotations and the advantage/disadvantage categorization is narratively inconvenient for discussing changes in comparative advantage. Therefore, we use the terminology of ‘strong/weak comparative advantage’ instead.

⁵A similar ‘constant market share’ condition has often been used to evaluate country's export competitiveness (e.g. Richardson, 1971a, b; Bowen and Pelzman, 1984; Chen et al., 2000). A country holding a constant share of a market is deemed as being able to maintain its competitiveness in the market.