Measuring Revealed Comparative Advantage by Balassa Index

Balance et al (1987) coined a basic theoretical framework that enabled us to determine relationship between conjectural notions of comparative advantage in relation to measuring comparative advantage practically.  

                                                    EC à CA à TPC à RCA

The above equation determines that economic conditions varying across countries are main drivers for international pattern of comparative advantage. The under lining factors of these patterns consist of production and consumption variables in international trade. The relationship between first three factors Economic conditions, comparative advantage and trade production and consumption factor are core to determine motives behind international trade theories. This refers to understand economic factors that thrives comparative advantage and promote trade and evaluate the effect of trade on economy by Balance et al (1987). 

Balassa Index:

In trade theory, the phenomenon of comparative advantage highly depends on the pre trade commodities‟ relative prices, but it cannot be observed in real world. Researchers or the economists may have access to future trade or the existing trade data. Thus to provide solution for calculating comparative advantage for any country or a commodity Bela Balassa (1965) proposed the concept termed as Balassa Index that calculated comparative advantage by means of differences in relative factor endowments.

The index computed by Bela Balassa worked on basis for revealing comparative advantage to the country’s most efficient, less efficient and least efficient sectors. Thus in broader concept it allows to explore competency of strong sectors of economy. To derive the comparative advantage from Balassa index post trade data is used. Hence, revealed comparative advantage is calculated by attaining the relative value of a commodity in country’s total export value divided by commodity relative value in world’s total export by Bela Balassa (1977).

Since Balassa index does not possess cardinal or ordinal property it has been discussed highly in literature because of its magnitude. Hence, it is considered as valuable tool in measuring advantage of an economy in a particular product deriving from post trade data. According to Michael Porter (2002) in some cases Balassa Index above 1 or in others Index exceeding 2 highlights country’s strong sectors.

Balassa Index is calculated according to the formula;

BRCAij = (Eij / Ej) / (Ei / E)

Where

BRCAij = Balassa Revealed Comparative Advantage index for commodity i of

Country j

Eij = Country j exports of commodity i

Ej = Country j total exports

Ei = commodity i total world exports

E = total world exports.

The equation above describes market share of country ‟j‟ in export of commodity ‟i‟ and compares its market share in the world export market. If the calculated value of BRCAij is greater than unity it means country ‟j‟ has comparative advantage in export of commodity ‟i‟. If BRCAij is less than 1, it indicates that country ‟j‟ has comparative disadvantage in export of commodity ‟i‟. Finally, if BRCAij is equal to 1, it means country ‟j‟ has neutral comparative advantage in commodity ‟i‟. 


Keywords: Comparative Advantage, Revealed Comaprative Advantage, Balassa Index