Government College University Lahore

International Economics (ECON 3201)

B.Sc. (Hons) Economics Evening
5th Semester

Assignment (Article Cracking)

Submitted to:
Sir Imtiaz Ahmad
Department Of Economics
GC University, Lahore

Submitted by:
Asif Khan
0923-BH(E)-ECO-20
Asif.mirza1172@gmail.com
Abstract:
In this paper, we examine the conceptualization of Revealed Comparative Advantage (RCA)
indexes as Contribution-to-the-Trade-Balance (CTB) indexes. CTB indexes are additive
applications of the Kunimoto-Vollrath principle. An additive CTB index computed with or
without adjusted trade flows and with normalization by total trade and GDP per capita provides
the best measures.

Introduction:
Measuring comparative advantages is a key issue for trade policy (Costinot et al., 2015).
Comparative advantages are typically measured by inferring a Revealed Comparative Advantage
(RCA) index from trade flows and, in some cases, GDP data. According to Balassa (1965), a
country is supposed to have comparative advantages for a given product if the share of that
product in that country’s exports is greater than the share at the level of the trade area under
consideration. Using both export and import data makes an RCA index compatible with a
flexible concept of comparative advantages. High values of the B index suggest strong
comparative advantages, even if the country has relatively small share of total exports. The B
index does not possess additivity across products and countries.

Baseline CTB Indexes:

is an export-import RCA index that combines symmetry and additivity across products and
countries without being subject to size bias. The Kunimoto-Vollrath principle underlies both
CTB indexes and the other previously discussed RCA indexes, as explained in more detail in
Section 4.1 below. Resting an RCA index upon a Ricardian model of international trade instead
of the Kunimoto-Vollrath principle may increase the theoretical robustness of the corresponding
CTB index. But doing so requires a focus on comparative advantages from the vantage point of
productivity differentials as captured by CTB, without being able to represent a flexible concept
of comparative advantages where product differentiation also matters. Last, similar to the size
bias, if the average productivity of a given country is small, large values of the -based index may
be obtained even though small across-productivity would suggest low comparative advantages.

An Empirical Evaluation:
All of the CTB indexes are characterized according to the Kunimoto-Vollrath principle. The
normalization variable is the use of adjusted trade flows; and further normalization by GDP
structure, either total GDP or GDP per capita. Table 1 recapitulates the three baselineCTB
indexes as well as the eight alternative CTB indices.
 Table 2 presents the features that make RCA indexes robust from a theoretical standpoint, and
indicates which features characterize each CTB index. The first five features –consistency with a
flexible concept of comparative advantages due to the use of both export and import data,
absence of size bias, symmetry and the two additivities– make the first baseline AW more robust
than the other CTB indexes.
 The main asset of alternative CTB indexes is that the former take into account GDP structure
and maintain normalization by total trade. For each trade area in the sample, we compute
different CTB indices and then apply a set of measures to generate a synthetic score regarding
the relative empirical accuracy of a CTB index. In this respect, the trade areas in our sample are
heterogeneous in order to be sufficiently representative. Some trade areas correspond to Regional
Trade Agreements (RTAs) like MERCOSUR or geographical spaces with overlapping RTAs
(e.g. Latin America). Others are conceptualized by gathering a given country with countries that
together represent 90% of the first country’s total trade over the last 25 years.

Conclusion:
A Revealed Comparative Advantage (RCA) index is based on the Kunimoto-Vollrath
principle, according to which the magnitude of the trade balance or another trade-related
parameter is compared to its expected value to reveal comparative advantages. An RCA index
can be combined with a preliminary adjustment of trade flows to make the measurement of
comparative advantages more robust. An additive CTB index computed with or without
adjustment of trade flows on the basis of trade data from 2019 and with normalization by total
trade and GDP per capita structure provides the best trade-off between empirical accuracy and
theoretical robustness among all CTB indexes under consideration. This year is the last year
available at the time of the paper, which justifies its use for adjusting trade flows as explained in
Section 2.2. Inquiring into alternative methods of computing global ranks would enhance the
reliability of this kind of assessment.

Funding:
This work was supported by Pontificia Universidad Javeriana.

Data Availability:
Each Excel file contains all values of a given CTB index across products and periods for a
specific country and trade area. The values are inserted into matrices whose rows identify
products and columns represent periods. In the repository, the 001_CTB + codes.pdf file
describes algorithms for computing the CTB indexes.

References:
1) Algieri etal., 2018B. Algieri, A. Aquino, M. Succurro
International competitive advantages in tourism: an eclectic view
Tourism Manag. Perspect., 25 (2018), pp. 41-52
2) Amador etal., 2011 J. Amador, S. Cabral, J.R. Maria
A simple cross-country index of trade specialization

3) Balassa, 1965B.A. Balassa

Trade liberalization and revealed comparative advantage
Manch. Sch. Econ. Soc. Stud., 33 (2) (1965), pp. 92-123
4) Bebek, 2011U. Bebek
Consistency of the proposed additive measures of revealed comparative advantage
Econ. Bull., 31 (2011), pp. 2491-2499
5) Costinot etal., 2012
A. Costinot, D. Donaldson, I. Komunjer
What goods do countries trade? A quantitative exploration of Ricardo’s ideas