Composite Revealed Comparative Advantage Index: A Non-parametric Approach

Abstract

The composition and share of export items from a country change over time. Individual exporting companies take firm-level actions to keep up their market share. A relative (to the point of reference) and comparative (compared to other exportable goods) advantage index for an export item can aid decision-making at the country and company levels. Present literature shows less reference to the existence of such an index. The popular Balassa’s revealed comparative advantage (B-RCA) index measures the comparative strength of a product at any given period. However, this method and its variants are time stationary and not directly applicable for sectors, i.e., groups of commodities with the same first four digits of the HS Code. Sector-level RCA aids in identifying the country's comparative advantage over the sector over time. For a given set of products, the paper uses many partner countries and a manyproduct trade approach. This paper suggests two indices to reflect the dynamic RCA. It suggests calculating the ratio of the Balassa index for each product for the current period and reference period – the relative revealed comparative advantage (RRCA); proposes geometric aggregation of these ratios to get a composite RCA (CRCA) index for a country.