Measures of Comparative Advantage. 2 Outline 1.Defining measures 2.Some tests and examples.

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1 Measures of Comparative Advantage

2 2 Outline 1.Defining measures 2.Some tests and examples

3 3 1. Defining Measures 1.1. Revealed Comparative Advantage (RCA) BALASSA where X are exports, i a country, j a set of goods This index compares the share of exports of good j of country i to the share of the same exports in world exports. RCAB>1 : comparative advantage.

4 4 1.2. RCA from own imports and exports RCAXMj = (Xj/Mj)/(X/M) RCAXM>1 : comparative advantage Dividing by X/M makes a correction for unbalanced trade. Easier to compute than Balassa’s: national data suffice. Variant : i=country, k=sector, [Xi+Mi] can be replaced by Y (GDP), 1000 can be replaced by 100; RCAF>0 = comparative advantage;  (RCAF) over k = 0; measures the difference between the trade surplus in k and what it would be if it was determined by its share in trade and the current trade balance. Source: Fontagne, L. & Freudenberg, M. (1999) “Marche unique et developpement des echanges” Economie et Statistique 326-327, 6/7, p. 45.

5 5 2. Some tests and examples 2.1. Relative labor cost and Relative export (cfr. Ricardo) Source: The Economist, Nov. 4, 1995.

6 6 Relative labor costs (2/2) Don’t mix  Real lative labor costs across goods and countries (Ricardo)  Nominal relative labor cost across countries Nominal relative labor costs

7 7 2.2. Factor endowments

8 8

9 9 Belgique : Evolution sectorielle de la valeur ajoutée et de l'emploi et composition sectorielle du commerce extérieur. Commentaires pour la production belge: Italiques gras : Reculs importants : rapport 2002/1995 inférieur à 1 pour la Valeur ajoutée et à 0,94 (moyenne de l'industrie) pour l'Emploi. Ordinaire gras : Avancées importantes : rapport 2002/1995 supérieur à 1,08 (moyenne de l'industrie) pour la Valeur ajoutée, et à 1 pour l'Emploi. Commentaires pour le commerce international: Colonne 7 : part du secteur i dans le commerce total de la Belgique. Colonne 8 : Rapports multilatéraux corrigés : Exportations totales (X)/Importations totales (M): [(Xi/Mi)/(X/M)] Sources : Calculs propres à partir de Belgostat-online (Banque Nationale de Belgique) données belges et des statistiques en ligne des Nations-Unies : Comtrade : http://unstats.un.org/unsd/comtrade/ données Belgique et Luxembourghttp://unstats.un.org/unsd/comtrade/

10 10 De Crombrugghe, A. (2004) “L’Elargissement de l‘U.E. et les tendances sectorielles du commerce exterieur et de l’activite economique de la Belgique” Studia Diplomatica, LVI, 5, 59-84.

11 11 Empirically weak link between production and employment growth and revealed comparative advantage (RCA) (even at end of observation period). Other elements to be taken into account: -RCA “before” and “after” and its evolution -RCA of trading partners -Domestic productivity of the industry, share of output -Investment and FDI. Quite often production growth and ex-post RCA are correlated, investment being driven by expected returns.