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Does Your Country Export What It Should?

Siddhesh Kaushik's picture

Customs reforms have made trade easier in Georgia. Photo - Irakli Tabagari / World Bank.One of the core principles of trade economics is that of “comparative advantage.” First described by David Ricardo, the theory says that countries are best off if they specialize in products that they can make relatively more efficiently – with lower opportunity cost – than other countries. If this happens, the theory goes, global welfare will increase. This concept is more difficult than it sounds, however – as Paul Krugman has pointed out quite eloquently – and benefits from illustration.

Basketball genius Michael Jordan stars in one example sometimes used in textbooks and classrooms: If Jordan mows his lawn faster than anyone else in the neighborhood, he has anabsolute advantage in lawn mowing. But that doesn’t mean that he should mow his neighbor John Smith’s lawn, because that would come at an opportunity cost: in the same two hours it would take Jordan to cut the grass, he could earn much more by playing basketball or making a commercial.

While it is difficult to measure comparative advantage in world trade, one indicator is something called “Revealed Comparative Advantage” (RCA). This is a measure of how a country’s exports compare to those of a bigger group, such as a region or the rest of the world. For example, if a country’s RCA in wheat is high (typically greater than one), that means wheat makes up a higher share of that country’s total exports than it does of the world’s exports. This suggests that that country is a more efficient wheat-producer than the average country.

But countries don’t always produce the products in which they have a revealed comparative advantage. Sometimes Michael Jordan mows the lawn. Let’s take a look at a couple of examples from this new data visualization tool.

Fuels are Saudi Arabia’s top export, and it has a high revealed comparative advantage in fuels. The country is exporting what it should. Ricardo would be pleased.

Saudi Arabia's top export is the same as its revealed comparative advantage.

Georgia, on the other hand, is a different story. The RCA evidence suggests that Georgia is a better-than-average producer of minerals. But the country’s top goods export is transportation equipment, a category that includes vehicles, railway locomotives, and auto parts and accessories. Indeed, three of the country’s top five product exports are automobiles, according to trade statistics at a fairly detailed level.

Georgia's top export category is different from the country's revealed comparative advantage.

What could be the reason for this discrepancy? Why would a country export en masse something that other countries produce more efficiently? There is plenty of room to speculate. For example, distortive government policies, such as trade barriers, could encourage the inefficient growth of a specific sector or change the mix of a country’s exports, as could high trade costs associated with the transport of goods or clearance at the border.

In Georgia’s case, it seems that both international relations and government reforms in the last decade have made it relatively easier for traders to import and export used cars. In 2013, Russia removed a ban on Georgian exports, according to the World Bank’s country program snapshot. In addition, demand for used cars increased among countries such as Kazakhstan and others in the Commonwealth of Independent States. Finally, a combination of lower tariffs and simplified customs procedures in Georgia has lowered the costs of trading used cars, according to a team of young economists at the International School of Economics in Tblisi, Georgia. All of this has created a “bonanza” for Georgia’s used car salesmen, and a surge in the country’s car exports.

Click here or explore the options below to get a hint of what your country’s story might be. Would it make Ricardo proud?
 

Exports vs. RCA



Note: The product aggregation was done using HS 1988/92 or H0 classification. For a complete list download the Excel file or visit the product metadata page in WITS.

Comments

Submitted by Sarah on

This is fascinating! Thanks for posting. Will the countries be updated soon? I live in Serbia -- Yugoslavia has not existed for quite a while now but it is still on the list.

I may contact you for more details if you don't mind. Thanks again!

Submitted by Azita on

Dear Sarah, thank you for the positive feedback. What is listed as Yugoslavia is in fact Serbia. We will correct this in near future.

Submitted by Yan Liu on

it is interesting. thanks for posting.:)
for China, it seems that the discrepancy also exist. so I wonder what the reasons might be?

Submitted by Rob Rudy on

This looks interesting, but I'm just not understanding it. RCA measures how much a country is exporting a given good relative to its total trade, in comparison to the share of that good in world trade. The bottom panel presumably shows the size of the square relative to the RCA. The top panel shows exports relative to the importance of exports in overall trade for a country. What's the difference between them?

Dear Rob,
Your understanding of RCA (the bottom panel) is correct. This is, the RCA is product’s (share of country exports)/(share of world exports). The top panel is where you may be confused. This simply shows the product as a share of the country’s exports (i.e. product/total exports), without taking into account the world. So, ideally, you want to have the country’s biggest exports (the bigger, greener boxes in the top panel) correspond with those in which the RCA is “green” in the bottom panel. We hope this helps.

Submitted by ADEFEMI CHARLES on

This is a great job ... Ao I wish this work can dive into more mineral trade in the next edition...

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