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 an absolute 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.
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.
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?