On the measurement of comparative advantage

This paper shows that the standard measure of revealed comparative advantage (RCA), ranging from 0 to ∞, has problematic properties. Due to its multiplicative specification, it has a moving mean larger than its expected value of 1, while its distribution strongly depends on the number of countries and industries. These properties make its outcomes incomparable across time and place and its economic interpretation problematic. We propose an alternative measure, the additive RCA, ranging from −1 to +1, with a symmetric distribution that centers on a stable mean of zero, independent of the classifications used. Statistical tests show the distribution of the additive index to be more stable. Besides, we propose an aggregate RCA, a regional specialization index, ranging from 0 for pure intra-industry trade to 1 for pure inter-industry trade. The same conclusions and proposals hold for the multiplicative location quotient (LQ), which is used as a measure for the revealed locational attractiveness of certain regions or countries for certain types of industry.