Constructing Aggregated Revealed Comparative Advantage Index of a Country

Abstract

The measures of revealed comparative advantage (RCA) with multiplicative specification and dependency on world trade of export items are incomparable across time and places. Intra-country comparisons by Balassa RCA and its variants are problematic, calling for a method of aggregating RCA of all sectors of a country reflecting the overall export potential of the country. Overall RCA of a country ( R C A t i ) is necessary to know the country’s RCA of all the export items as a function of trade flows relative to a point of reference, that is, a base period. The article proposes geometric aggregation of the ratio of RCA at the current period over the base period for each sector to get R C A t i by a continuous, monotonically increasing function of time, satisfying time-reversal test, formation of chain indices and generates time-series data. Progress path of R C A t i and similar path of jth sector may help policymakers to decide on appropriate action for the economy and individual sectors. Distribution of R C A t i will approach lognormal. Knowledge of distributions of R C A t i for different countries helps to have a better inter-country comparison. The similarity of two RCA curves may be evaluated by similarity measures. An empirical illustration of the proposed method is given. JEL Codes: C43, F14