Constructing aggregated revealed comparative advantage index of a country

The measures of revealed comparative advantage (RCA) with multiplicative specification and dependency on world trade of export items are incomparable across time and places. Intra-country comparisons by Balassa RCA and its variants are problematic, calling for a method of aggregating RCA of all sectors of a country reflecting the overall export potential of the country. Overall RCA of a country (RCAti) is necessary to know the country’s RCA of all the export items as a function of trade flows relative to a point of reference, that is, a base period. The article proposes geometric aggregation of the ratio of RCA at the current period over the base period for each sector to get RCAti by a continuous, monotonically increasing function of time, satisfying time-reversal test, formation of chain indices and generates time-series data. Progress path of RCAti and similar path of jth sector may help policymakers to decide on appropriate action for the economy and individual sectors. Distribution of RCAti will approach lognormal. Knowledge of distributions of RCAti for different countries helps to have a better inter-country comparison. The similarity of two RCA curves may be evaluated by similarity measures. An empirical illustration of the proposed method is given.JEL Codes: C43, F14