Indices of revealed comparative advantage and Ricardian trade

This article expands on the work of Deb and Basu (2011) by examining the consistency of various exports only and export (and in some specifications, import) based revealed comparative advantage (RCA) indices with the Ricardian theory of comparative advantage. This literature has been overlooked in recent years due to the rise of multinational production processes, which cause gross measures of exports by sector to become problematic in analyzing trade. This article attempts to overcome these problems by creating a data set across time, countries and economic sectors of value-added by sector embedded in countries' exports.  This new dataset is then used to calculate RCA indices for a number of country-years using several different formulas.  While many of the various RCA indices proposed over the years perform well in our analysis, our results favour the indices of Laursen (1998) and Deb-Basu, which is a logarithmic transformation of an earlier index proposed by Balassa (1965). However, the Deb-Basu index has a number of structural features that make it more desirable than the Laursen index.  We also examine the possibility that the these indices, which have been based almost entirely on measures of gross exports, do not perform well in the presence of intra-industry trade, where a country may be both importing and exporting goods from a particular sector at the same time.  As such, we create modified versions of our indices that focus on net exports by sector, in some cases using adjusted import measure that try to account for the effect of trade barriers.  However, we find that these modified indices do not perform better than those that solely use our value-added in exports data.