Revealed Comparative Advantage

The Revealed Comparative Advantage (RCA, dt. The disclosed comparative advantage ) is an index based on the theoretical considerations of the comparative cost advantage of David Ricardo . It is also known as the Balassa index , after the Hungarian-American economist Béla Balassa . The RCA index aims to measure the comparative cost advantage on a national and international level. With the help of the RCA coefficient, the comparative advantages can be determined for individual economic sectors. The higher the RCA coefficient, the greater it is.

The RCA index also provides information about a country's specialization in foreign trade when imports are included . The export-import-relation of a country is determined in a certain product group in relation to the total export-import-relation of this country. The indicator thus also takes into account the extent to which domestic industry succeeds in asserting itself against foreign competition on the domestic market.

history

The RCA index is based on the theoretical considerations of the comparative advantage of David Ricardo.

Liesner in 1958 and Béla Balassa in 1963 provided empirical evidence for the classic Ricardo model . In this context, Liesner investigated the European Coal and Steel Community (ECSC), Sweden and British industry. He investigated the comparative advantages on the basis of exports and imports from Great Britain to continental Europe and Sweden in 16 different economic sectors from 1953 to 1956. In his study he comes to the conclusion that differences in the form of comparative advantages of individual goods exist between Great Britain and continental Europe. As a further result, he concludes that Great Britain can only benefit from entering the Free Trade Area (ECSC). In this context, Great Britain could specialize in the production of goods for which the country has comparative advantages. Accession would lead to a higher standard of living in Great Britain. With this study, Liesner (1958) is considered one of the pioneers of the RCA index.

In 1963, immediately after the Second World War, the Hungarian economist Balassa empirically examined and compared the productivity and exports of the USA and Great Britain in 26 industries. He found that British labor productivity lagged behind the US in almost every area. So the US had an absolute advantage everywhere. The total volume of exports was approximately the same between the two countries, so that there must have been some areas or sectors in which Great Britain had a comparative advantage despite absolutely lower productivity. This study found that higher productivity in a certain industry compared to other countries does not by itself guarantee that the country concerned exports the products of that industry. Balassa proved that US exports only outperformed Britain in industries where the US productivity advantage was more than double. With his 1963 study, Balassa made it clear that trade does not depend on absolute, but on comparative advantages.

In his 1965 essay, Balassa makes it clear that it is necessary to establish the comparative advantages between countries. For the first time, he used the term disclosed comparative advantage, which can be identified by the trade flows of the countries under consideration. Balassa examined exports from various countries, including those of the USA, Canada, Western Europe (European Coal and Steel Community), Sweden, Great Britain and Japan. In doing so, he compared the export ratio of a branch of a country to the total export of this country and put it in relation to this sector of a reference country group. He also examined export-import relationships for various industrial goods from countries. He found, among other things, that the USA and Great Britain had a comparative advantage over all other countries in the production of electric generators. Japan, however, had a comparative advantage in the production of electrical machines. In conclusion, he concluded that comparative advantages depend on a variety of factors, including: B. technological progress, labor costs and the quality of products.

calculation

Standard formula according to Balassa

A wide variety of formulas can be found in the literature. The standard formula according to Balassa determines the RCA index, with which the comparative cost advantage can be calculated on both a national and an international level. Using the calculated RCA coefficients, the respective comparative advantages for a certain economic sector can be read off. The higher the coefficient, the greater the benefit. The standard Balassa formula is:

${\displaystyle {RCA_{ij}}={\frac {X_{ij}/\sum _{j}X_{ij}}{\sum _{i}X_{ij}/\sum _{i}\sum _{j}X_{ij}}}}$

${\displaystyle X_{ij}}$stands for the export of a product in the country . If that is the case, the country has a comparative advantage in the production of the good . In the case of a negative RCA index, i. H. , the country has a comparative disadvantage in the production of the property . This means: the larger the index, the more proven the advantage or the lower the index, the worse the disadvantage. ${\displaystyle j}$ ${\displaystyle i}$ ${\displaystyle RCA_{ij}>1}$ ${\displaystyle i}$ ${\displaystyle j}$ ${\displaystyle RCA_{ij}<1}$ ${\displaystyle i}$ ${\displaystyle j}$

Other forms of calculation

Different formulas can be found in the literature, but ultimately they always relate either the national and international exports or the export-import ratio of a sector (e.g. food) to the country as a whole. The RCA index is used to show the comparative advantage. In order to obtain this, the calculated results are compared. It should be clear which formula you choose. That depends u. a. on what should be put in relation.

The standard formula described above can also be referred to as follows:

${\displaystyle {RCA}={\frac {E_{ij}/E_{it}}{E_{nj}/E_{nt}}}}$

Here is the national economic sector (e.g. machine exports ) and are all sectors, are the national total exports and the international total exports. So the national sector is divided by all national exports BY the global sector by world exports. ${\displaystyle i}$ ${\displaystyle t}$ ${\displaystyle j}$ ${\displaystyle n}$

The result is a ratio of the national sector share to the international sector share. If the index is greater than 1, this is an indication of specialization in a regional or national economy , because the regional sector share is relatively larger than the international sector share. An index below 1 indicates the opposite.

The following formula can also be found in the current literature:

${\displaystyle RCA=100\cdot ln\left({\frac {X_{i}/IM_{i}}{X/IM}}\right)}$

Contrary to the two previous formulas, this formula does not compare international exports with national exports, but national exports with imports. And denotes the exports or imports of the sector (e.g. the food industry). and denote the country's exports and imports. A positive value means, with a balanced trade balance , an export surplus . This means that the country has exported more goods in the sector than it has imported. Again a negative RCA index means that the country has imported more goods from the sector . A balanced trade balance means that the denominator is equal to 1, i.e. that the country's imports correspond to its exports. If there is a trade balance surplus , i.e. exports are higher than imports, the ratio between exports and imports in the sector must be greater than in the economy as a whole in order to be able to speak of a comparative advantage. Since the RCA index is an adjusted figure, the RCA values ​​of countries of different sizes can be compared with one another. ${\displaystyle X_{i}}$ ${\displaystyle IM_{i}}$ ${\displaystyle i}$ ${\displaystyle X}$ ${\displaystyle IM}$ ${\displaystyle i}$ ${\displaystyle i}$ ${\displaystyle i}$

The following formula could also be considered: Here, too, the exports and imports of a certain sector are compared with the total exports ( ) and total imports ( ) of a country. ${\displaystyle i}$ ${\displaystyle X_{g}}$ ${\displaystyle IM_{g}}$

${\displaystyle RCA=(G_{i}-A)\cdot \left({\frac {100}{1-A}}\right)}$

${\displaystyle G_{i}}$ represents the goods group foreign trade coefficient. This is calculated as follows:

${\displaystyle G_{i}=\left({\frac {X_{i}-IM_{i}}{X_{i}+IM_{i}}}\right)}$

This coefficient already indicates whether there is an export or an import surplus.

Calculation of the aggregated foreign trade coefficient : ${\displaystyle A}$

${\displaystyle A=\left({\frac {X_{g}-IM_{g}}{X_{g}+IM_{g}}}\right)}$

If the trade balance is balanced, it will assume the value 0. The difference between and is then weighted with the factor . However , if there is a trade surplus , it is greater than 0 and the RCA values ​​of the goods group are weighted higher. The reverse is true for a trade deficit . ${\displaystyle A}$ ${\displaystyle A}$ ${\displaystyle G_{i}}$ ${\displaystyle 100}$ ${\displaystyle A}$

Example calculation

The RCA index in the form of the standard formula according to Balassa will now be explained in more detail using the example of the automotive industry in Germany.

${\displaystyle {RCA_{AutoDE}}={\frac {{\text{Export Autos aus Deutschland}}/\sum {\text{Exporte aus Deutschland}}}{\sum {\text{Exporte Autos aller Länder}}/\sum {\text{Exporte aller Länder}}}}}$

To make it easier to visualize, freely chosen numbers are now used:

${\displaystyle {RCA_{AutoDE}}={\frac {2{\text{ Mrd.}}/50{\text{ Mrd.}}}{10{\text{ Mrd.}}/1.000{\text{ Mrd.}}}}=4}$

In order to be able to compare this result, freely selected values ​​from another country are also used. It is therefore assumed that one billion cars are exported from the analogue country (VGL) to other countries and that this analogue country has a total export of 40 billion.

${\displaystyle {RCA_{AutoVGL}}={\frac {0,25{\text{ Mrd.}}/10{\text{ Mrd.}}}{10{\text{ Mrd.}}/1.000{\text{ Mrd.}}}}=2{,}5}$

If you compare the two results, Germany has an index of 4 and the comparison country an index of 2.5. This means that Germany obviously has a comparative advantage compared to the analogue country, and thus Germany has a disclosed comparative advantage in the production of cars. In general there is an advantage in both countries, since the values ​​are positive, i.e. greater than 1.

If one compares the two countries without including the ratio of car exports of the countries to total exports of the countries, an index of 0.04 is obtained for Germany and an index of 0.025 for the reference country. This confirms the proportionality of both index numbers. Both and equals 1.6. Germany has a higher index and thus a disclosed comparative advantage over the analogue country. ${\displaystyle {\tfrac {4}{2{,}5}}}$ ${\displaystyle {\tfrac {0{,}04}{0{,}025}}}$

RCA index for Germany, Austria and Switzerland in various product groups

RCA index of Germany

The table shows Germany's disclosed comparative advantage (RCA) in selected groups of goods, from 2002 to 2008.

Goods group	2002	2003	2004	2005	2006	2007	2008
Coffee, tea, mate and spices	0.605	0.599	0.612	0.738	0.736	0.705	0.704
Pharmaceutical products	1.126	1.186	1.433	1.545	1,592	1.619	1.715
Drinks, spirits and vinegar	0.583	0.590	0.583	0.666	0.687	0.657	0.699
cotton	0.375	0.331	0.321	0.327	0.309	0.294	0.296
iron and Steel	0.973	0.881	0.818	0.882	0.926	0.871	0.823

All stated values ​​greater than 1 represent a comparative advantage for Germany. In the years 2002–2008 Germany exported more pharmaceutical products than it imported, and thus a comparative advantage in this group of goods. In the cotton goods group, on the other hand, Germany has a comparative disadvantage, as the values ​​are less than 1.

RCA index for Austria

This table shows Austria's RCA index in selected groups of goods in the period from 2002 to 2008. A value greater than 1 means that the country has a disclosed comparative advantage in this group of goods.

Goods group	2002	2003	2004	2005	2006	2007	2008
Coffee, tea, mate and spices	0.721	0.858	0.740	0.788	1.028	0.952	0.871
Pharmaceutical products	1.536	1.418	1.198	1.501	1,596	1,539	1.619
Drinks, spirits and vinegar	1.644	2.053	2,434	2,692	2,680	2,498	2.295
cotton	0.698	0.679	0.593	0.561	0.503	0.522	0.539
iron and Steel	1.523	1.516	1.337	1.636	1.562	1.647	1.733

RCA index of Switzerland

The following table shows the RCA index of Switzerland in selected groups of goods in the period from 2002 to 2008. As in the table above for Austria, a value greater than 1 means that the country has a disclosed comparative advantage in this group of goods.

Goods group	2002	2003	2004	2005	2006	2007	2008
Coffee, tea, mate and spices	0.384	0.454	0.553	0.604	0.634	1.463	1,874
Pharmaceutical products	5.985	6.264	6.530	7.130	7.743	6.603	7,993
Drinks, spirits and vinegar	0.182	0.187	0.195	0.307	0.751	0.889	1.261
cotton	0.576	0.473	0.483	0.444	0.401	0.428	0.427
iron and Steel	0.281	0.290	0.286	0.289	0.303	0.294	0.283

Application examples

In the following, two companies will be named that include the RCA index in their calculations. It becomes clear that these examples are always economic forecasts based on data from the past and an analysis of the competitive situation.

Use of the RCA index by Deutsche Bank

In July 2012, Deutsche Bank announced an economic outlook for Germany under the heading “Current Issues”. It refers to data from previous years. She goes u. a. on the position of Germany compared to international trade. One point here are the comparative advantages and disadvantages of trade in services in Germany. For this purpose, the exported share of a service category of the total German exports is compared to the worldwide exports of the category. The Deutsche Bank comes to the conclusion that since 1980 there has been a comparative advantage in the international travel industry. However, the transport services sector had a comparative disadvantage at the beginning of the 1990s, which developed into a comparative advantage a few years later. She names the reason for this with the opening of Eastern Europe . All other areas of the services sector are also positive and therefore have a comparative advantage.

Use of the RCA index by the federal authorities of the Swiss Confederation

In contrast to Deutsche Bank, the federal authorities of the Swiss Confederation use the RCA index in such a way that the export-import ratio is put into relation. The Cleantech Switzerland Master Plan , whose measures and recommendations were endorsed at the Innovation Conference in November 2011, aimed to improve the Swiss economy in the global growth market of clean and resource-efficient technologies . The RCA index was used in this master plan to show the foreign trade strength of the respective cleantech segments. The export-import ratio of the individual cleantech sectors of a country was compared with the export-import ratio of all goods in the country. Positive values ​​stand for the comparative advantage and thus for a strong international competitive position. In the 2011 master plan it becomes clear that the cleantech sectors have an above-average position in relation to the RCA index compared to all goods in Switzerland, with the exception of renewable materials and sustainable mobility. It can also be seen that Switzerland has strong foreign trade, especially in the sectors of electricity storage, waste management & resource efficiency, environmental technologies in the narrower sense and energy efficiency. It was also pointed out that the global competitive situation worsened in the period from 2000 to 2007, compared to the previous period from 1991 to 1999.

criticism

The indices include the effect of tariff - such as tariffs and subsidies - and non-tariff trade barriers - such as import quotas or voluntary export restrictions - as they refer to actually observed figures. For example, one economic sector is highly competitive , simply because it is protected from foreign competition by protectionist measures. The loss of such state protection would negatively affect competitiveness. The reason for a change in such an index may well be a reduction in protection or the opening of markets. The competitive situation of a sector or a country is measured on the basis of actual figures, but these do not contain any information about the determining factors of international competitiveness. Determining such causal relationships is often somewhat arbitrary. It is often too hasty to assume that a country's international competitiveness will deteriorate due to the fact that only factors from the country are used that increase the costs of a sector in this country. It does not go into the fact that an economic process is a dynamic development in which it often happens that sectors shrink or lose, while other sectors in turn expand and achieve international competitiveness.

If there are several goods, the RCA values ​​lack a consistent theoretical basis against which these values ​​can be interpreted.

literature

• Bela Balassa: An empirical demonstration of classical comparative cost theory. In: The Review of Economics and Statistics. Vol. 45, No. 3, 1963, pp. 231-238.
• Balassa Index , accessed November 9, 2015.
• Bela Balassa: Trade Liberalization and "Revealed" Comparative Advantage. In: The Manchester School. Vol. 33, No. 2, 1965, pp. 99-123.
• Bundesbank: On the development of exports in the four large EMU member states since the beginning of monetary union. In: Monthly Reports. July 2011. ( online , PDF; 684 kB)
• The federal authorities of the Swiss Confederation: Masterplan Cleantech Switzerland, Bern 2010, pp. 19-20 ( Memento of March 11, 2016 in the Internet Archive ). (PDF; 804 kB)
• Deutsche Bank AG: Outlook for Germany. Frankfurt am Main 2012, p. 9. ( online , PDF; 1.7 MB)
• DIW Berlin: DIW Glossary, Revealed Comparative Advantage (RCA).
• FAO: Assessment of comparative advantage in aquaculture. (= FAO fisheries and aquaculture technical paper. No. 528). Rome 2009, ISBN 978-92-5-106432-0 , pp. 69ff. (Attachment). ( online , PDF; 221 kB).
• H. Hanusch, T. Kuhn, U. Cantner : Economics 1, Fundamental Micro and Macroeconomics. 6th edition. Springer, Berlin et al. 2002, ISBN 3-540-43288-4 .
• Keld Laursen: Revealed Comparative Advantage and the Alternatives as Measures of International Specialization. Department of Industrial Economics and Strategy / DRUID; Copenhagen Business School, 1998. ( online , PDF; 116 kB)
• Paul R. Krugman, Maurice Obstfeld, Marc Melitz: International Economy: Theory and Politics of Foreign Trade. 9th edition. Pearson, Munich 2012, ISBN 978-3-8273-7361-8 .
• HH Liesner: The European common market and British industry. In: The Economic Journal. Vol. 68, No. 270, 1958, pp. 302-316.
• Oliver Lorz, Horst Siebert: Foreign trade :. 9th edition. UVK-Verlagsgesellschaft, Konstanz / Munich 2014, ISBN 978-3-8252-8493-0 , p. 127.
• Gerhard Rübel: Basics of real foreign trade. Oldenbourg Wissenschaftsverlag, Munich 2004, ISBN 3-486-27560-7 , p. 139ff.

Individual evidence

1. ^ HH Liesner: The European common market and British industry. In: The Economic Journal. 1958, p. 311.
2. ^ HH Liesner: The European common market and British industry. In: The Economic Journal. 1958, p. 313.
3. ↑ Bela Balassa: An empirical demonstration of classical comparative cost theory. In: The Review of Economics, Statistics. 1963, pp. 231-238.
4. ^ Paul R. Krugman, Maurice Obstfeld, Marc Melitz: International economy: theory and politics of foreign trade. 9th edition. Pearson, Munich 2012, p. 82f.
5. ↑ Bela Balassa: Trade Liberalization and "Revealed" Comparative Advantage. In: The Manchester School. Volume 33, No. 2, 1965, pp. 99-123.
6. ^ FAO: Assessment of comparative advantage in aquaculture. (= FAO fisheries and aquaculture technical paper. No. 528). Rome 2009, ISBN 978-92-5-106432-0 , pp. 69ff. (Attachment). (PDF; 221 kB)
7. ↑ Oliver Lorz, Horst Siebert: Außenwirtschaft. 9th edition. UVK-Verlagsgemeinschaft, Konstanz / Munich, 2014, ISBN 978-3-8252-8493-0 , p. 127.
8. ↑ The federal authorities of the Swiss Confederation, Masterplan Cleantech Switzerland, Bern 2010, p. 19 ( Memento of March 14, 2016 in the Internet Archive ) (PDF; 804 kB)
9. ↑ Wiwiwiki, RCA Index , June 10, 2015.
10. ^ Balassa Index Germany , accessed on November 9, 2015.
11. ^ Balassa Index of Austria. Retrieved November 9, 2015.
12. ^ Balassa Index Switzerland. Retrieved November 9, 2015.
13. ↑ Deutsche Bank AG, Outlook for Germany, Frankfurt am Main 2012, p. 9. (PDF; 1.7 MB)
14. ↑ The Federal Authorities of the Swiss Confederation, Masterplan Cleantech Switzerland, Bern 2010, pp. 19-20 ( Memento of March 14, 2016 in the Internet Archive ) (PDF; 804 kB)
15. ^ Gerhard Rübel: Basics of real foreign trade. Oldenbourg Wissenschaftsverlag, Munich 2004, ISBN 3-486-27560-7 , pp. 139f.
16. ↑ Oliver Lorz, Horst Siebert: Außenwirtschaft. 9th edition. UVK-Verlagsgesellschaft, Konstanz / Munich 2014, ISBN 978-3-8252-8493-0 , p. 127.