Revealed comparative advantage

Revealed comparative advantage: Origin and Mathematical Formulation

Revealed comparative advantage: Practical Issues

Revealed comparative advantage: Extensions

Revealed comparative advantage (RCA) is an empirical measure of the extent to which a given country specializes in the export of a particular product or range of products, compared with a reference set of countries. It is usually computed from trade data.

International trade theory starts from the premise that production specialization across different countries, followed by exports of the goods specialized in and imports of goods specialized in by other countries, leads to overall welfare gains for all economies. The pattern of specialization is called ‘‘comparative advantage,’’ which is the result of relative advantage in access to materials, energy, or technological skills that are crucial for the efficient production of the exported good.Other countries would establish relative advantages in other goods that they export. The patterns of exports and imports would then derive from this relative or comparative advantage in production.

Trade theory begins by predicting patterns of trade from the existence of relative or comparative differences in natural resource endowments or capability acquired from production experience or technological change. The RCA approach starts from the other end of the production-trade chain, that is, the empirically observed patterns of export and import specialization revealed by the trade data. The explanation of the pattern of specialization is treated as a secondary matter to be inferred from the observed data on trade. Thus if the proportion of wine in France’s exports is higher than the ratio of wine to all exports in the Organisation for Economic Co-operation and Development (OECD) group as a whole, France is said to have revealed comparative advantage in the export of wine relative to the OECD reference set. Note that this does not imply that France would have RCA with respect to some other set of countries.

See also comparative advantage; intraindustry trade

FURTHER READING

• Balassa, Bela. 1965. ‘‘Trade Liberalization and ‘Revealed’ ComparativeAdvantage.’’Manchester School of Economic and Social Studies 33 (2): 92 123.The firstpublished use of the Balassa index to measure RCA. 
• . 1989. ‘‘‘Revealed’ Comparative Advantage Re visited.’’ In Comparative Advantage, Trade Policy, and Economic Development, edited by Bela Balassa. New York: New York University Press, 63 79. In this paper, Balassa further developsRCA measures in trade analysis. 
• Batra, Amita, and Zeba Khan. 2005. ‘‘Revealed Compara tive Advantage: An Analysis for India and China.’’ Working PaperNo. 168.NewDelhi: IndianCouncil for Research on International Economic Relations. Down loadable fromhttp://www.icrier.org. Illustrates the value of the RCA concept to track evolving patterns of export and production specialization in India and China. 
• Laursen, Keld. 1998. ‘‘Revealed Comparative Advantage and the Alternatives as Measures of International Spe cialization.’’ DRUID Working Paper 98 30. Copen hagen. An exposition of various RCA measures that are compared for many countries.
•  Liesner,H. H. 1958. ‘‘The EuropeanCommonMarket and British Industry.’’ Economic Journal 68 (270): 302 16. The first use of the relative share concept to measure specialization in trade. 
• Marrewijk, Charles Van. 2002. International Trade and the World Economy. Oxford: Oxford University Press, 36 40. Presents a simple introduction to the Balassa index along with practical applications. 
• Utkulu, Utku, and Dilek Seyman. 2004. ‘‘Revealed Com parative Advantage and Competitiveness: Evidence for Turkey vis a` vis the EU 15.’’ European Trade Study Group, 6th Annual Conference (ETSG 2004). Not tingham, UK. Employs alternative RCA indexes to ex amine Turkey’s exports to the European Union and discusses the merits of various indexes. 
• Vollrath, T. L. 1991. ‘‘A Theoretical Evaluation of Alter native Trade Intensity Measures of Revealed Compa rative Advantage.’’ Weltwirtschaftliches Archiv 127 (2): 265 80. A theoretical assessment of the various RCA measures in use.
•  Yu R., J. N. Cai, and P. S. Leung. 2008. ‘‘The Normalized Revealed Comparative Advantage Index.’’ Annals of Re gional Science. Available online at http://www.springer link.com/content/qx7j588366801n05/fulltext.pdf. 

G. CHRIS RODRIGO