Abstract
This paper shows that the standard measure of revealed comparative advantage (RCA), ranging from 0 to ∞, has problematic properties. Due to its multiplicative specification, it has a moving mean larger than its expected value of 1, while its distribution strongly depends on the number of countries and industries. These properties make its outcomes incomparable across time and place and its economic interpretation problematic. We propose an alternative measure, the additive RCA, ranging from −1 to +1, with a symmetric distribution that centers on a stable mean of zero, independent of the classifications used. Statistical tests show the distribution of the additive index to be more stable. Besides, we propose an aggregate RCA, a regional specialization index, ranging from 0 for pure intra-industry trade to 1 for pure inter-industry trade. The same conclusions and proposals hold for the multiplicative location quotient (LQ), which is used as a measure for the revealed locational attractiveness of certain regions or countries for certain types of industry.
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Notes
In fact, if domestic demand specialization and import specialization are added to export and domestic output specialization, a handy choice of formula applied to the appropriate accounting identity results in a precise relationship between the RCA and the LQ (see van der Linden and Oosterhaven 2001, for an empirical account). Bowen (1983, 1985, 1986) uses this relationship to derive his alternative, net trade definition of the RCA. Combined with the assumption of identical homothetic preferences, this leads to an RCA that equals the production LQ minus 1. Balance et al. 1985, 1986) and Volrath (1991) however, challenged Bowen’s RCA on several grounds.
These data were collected for a study into the consequences of the EU-enlargement for the bilateral trade between The Netherlands and Poland (Hoen and de Mooij 2001). The reference group consists of the EU-countries Austria, Belgium/Luxembourg, Denmark, Germany, Spain, Finland, France, United Kingdom, Greece, Ireland, Italy, Portugal, and Sweden. The reference group excludes the Netherlands and Poland for reasons to be given in the next section.
Husted and Melvin (2000, p. 137) aggregate the absolute differences between export and import shares, and Krugman and Obstfeld (2000, p. 138) use the difference between exports and imports divided by the sum of both, all per sector. Our specification has the advantage of only using export data, which are mutually more comparable (van der Linden 1998, p. 82–89). The standard deviation of (4) also represents a measure of aggregate export specialization. However, with squared differences extreme deviations are weighted more heavily. We prefer (5) as it weighs all differences equally, be they small or large.
Note that the SITC-1 classification only contains ten very aggregate commodity groups, which in general is too aggregate for a meaningful empirical analysis of comparative advantage.
This Additive Spatial Concentration Index has much better properties than the widely used Herfindahl index, which aggregates squared shares (Herfindahl 1950). A major disadvantage of the Herfindahl index is that it has an unstable lower bound (perfect spreading) that depends on the number of countries used in the analysis, but this is a topic for another article.
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