Revealed comparative advantage: Practical Issues
Since its initial formulation, RCA indexes have been widely used to track specialization with regard to participation in the international economy. Starting from specialization in particular goods or ranges of goods, RCAs have been calculated for goods intensive in capital or labor, intermediate products, energy, a wide range of agrobased exports, and exports that use particular technologies. It is often the ‘‘first cut’’ analytical tool in export competitiveness studies carried out by academics and international consultants.
RCAs are even worked out for the generation of patentable innovations (Laursen 1998). The RCA concept has turned out to be a very flexible tool of analysis and the original formula has been modified in a wide variety of ways, a few of which are outlined in the next section. It is also clear that the formulation can be adapted easily for import specialization as well and there are indexes that use both export and import data.
RCAs must be used with some care. They are useful to identify sectors that are strong and have the potential to be built up further. But the index cannot be used to infer competitive strength vis-a`-vis another country in the same reference set. A large country with a more diverse range of exports will have a smallerRCAthan a small nation that concentrates on a much smaller set of exports but has comparable competitive strength. Nor do relative values of different products for the same country saymuch about the relative importance of these products for the economy. For example, tobacco has the highest Balassa index for the United States over a long time span, but this is hardly its most important export product (Marrewijk 2002).
RCA measures are also affected by trade barriers or subsidies since these could distort exports or raise production costs by raising the price of imported inputs. Reexports and a high degree of intraindustry trade also pose special problems, which can be handled by the use of alternative measures (Laursen 1998; Utkulu and Seyman 2004).