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?
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.
Please enlighten me. I appreciate the visualisation of the data and the story about comparative advantage vs. actual specialisation vs. what shows up in the export data. However I must be missing something important. Your RCI index seems to be based on a country's export basket relative to the rest of the world? If tho is so, aren' we measuring the same thing twice: (i) a basket of exports which determines RCA and (ii) the actual exports. Or is there something else, like a difference in methodology, such as ignoring reexports, or using costs-- which should have been included in the explanation?
In this blog, we were trying to explore the relationship between RCA for product groups versus trade of the product group. Does higher RCA mean more trade. While many countries confirm to this, there are exceptions like Georgia. We then tried to figure out possible reason for this discrepancy (re-exports of used cars in this case).
On question on RCA calculation the formula is given below
The RCA index of country I for product j is measured by the product’s share in the country’s exports in relation to its share in world trade: RCAij = (xij/Xit) / (xwj/Xwt) Where xij and xwj are the values of country i’s exports of product j and world exports of product j and where Xit and Xwt refer to the country’s total exports and world total exports.
Thank you for the clarification, but it doesn't address my doubt. Basically, you are comparing:
1- a country's exports
2- a country's exports, relative to the rest of the world.
What can be inferred from this comparison is that a country is exporting a large value in oil products, even though its relative strength lies in electronics. But this is just because oil is one of the work's top trading commodities. Not because the country took a different pattern of specialization than its resource endowments would predict.
Am I right?
Yes – As you mentioned, high value exports such as oil can be special cases. In addition, the data used includes re-exports, so that is another aspect of the data that could be tricky.
Revealed comparative advantage is just one way of getting some insight into a country’s exports. With each country case, further exploration and analysis would be needed to get a full picture of the country’s performance.
Thanks for writing – we appreciate the conversation!
It appears several Caribbean island nations are missing from your table. The Caribbean Development Bank, Caribbean Export Bank, IDB and Caribbean Refional Machinery, should all be in a position to easily provide this information. Could you perhaps assign someone on your team to get the information on these countries and make it available inyour graphic please? Thank you.
Thank you for the comment. The export values and indicators for the visualization were created using UN COMTRADE data and include all countries that have reported their exports data to UNSD for 2012. The list of countries for which 2012 data is available here: http://wits.worldbank.org/CountryProfile-DataAvailability.aspx. Unfortunately, the 2012 data for five Caribbean countries (Suriname, Trinidad and Tobago, Montserrat, St Kitts & Nevis, Saint Lucia) is missing from the UNSD list, and other sources have incomplete data for this visualization. In the future, we are planning to add a visualization model similar to this one to our trade platform World Integrated Trade Solution (WITS). That will get live data updates, so the visualization will be updated shortly after that data is submitted to UN COMTRADE.
Dear Mr. Kaushik,
I have read your article on the revealed comparative advantage vs. actual exports and I have found it interesting. However when I looked at Greece, actual exports recorded a large percentage of fuels as exports. Given that Greece is not an oil producing nation, oil is recorded as an export since there two major oil refineries that import oil and re-export it. This effect distorts the real picture of the export profile of Greece and I guess of other countries which have large refineries and act as intermediaries. I can imagine other countries like Bermuda with significant pharmaceutical exports although no actual production takes place. It is just an accounting effect of import and re-exportation.
Dr. Nick Georgiopoulos
Bermuda Monetary Authority
Response from Siddhesh Kaushik:
That is an excellent point you have raised. We are using Gross Exports (Exports + Re-Exports) for the visualizations hence we get to see these discrepancies, and in fact in the example we used also explains it is Georgia’s export of used cars.
Hi it is interesting
My country export natural ressourcies like, bauxite,diamond but u didn't see nothing
Even the name Guine Conakry
Thank you for your comment, and apologies for the delay in responding. Siddhesh asked to pass along this message:
The visualization was created using 2012 trade data available as of Aug 2014. Guinea’s has reported data only until 2008 and hence missing in the visualization. You can browse Guinea’s trade data here http://wits.worldbank.org/CountryProfile/Country/GIN/Year/2008/Summary
Thanks for bringing these facts through illustrations. In my view, however, in the present trading regime RCA does not reflect true picture. It may give a distorted picture if one compares two unequal economies. Smaller economy may have high RCA but the bigger economy could have large market share due to its high volume of exports vis a vis the smaller economy, despite low RCA.
Several other factors like RTAs, exporting countries policies and private sector induced supply chains are now becoming important now a days.