Net Comparative Advantage Index: Overcoming the Drawbacks of the Existing Indices

Abstract

In this paper, we examine a number of indices used for measuring comparative advantages of a country in international trade for a good and propose the new net comparative advantage index that has several strong features. First, it reflects net trade, and that's why it is more theoretically grounded than indices calculated only from export data. Second, it is consistent with Kunimoto (1977) theoretical framework that is highly appreciated among trade economists. Third, it is not totally focused on a single commodity (that is, it takes world trade structure into consideration), unlike net export index. Fourth, it accounts for economic openness, using GDP as a scale variable. Fifth, it is hardly exposed to structural distortions. Finally, its sign is consistent with the sign of the net trade. We compare the new index with CEPII theoretically grounded econometric indicator and show that the proposed index has better empirical characteristics and is much easier to calculate and interpret. JEL Classification: F14.

Products Mapping' and Agri-Food Trade between Nigeria and ECOWAS Member Countries

“…The LFI, by taking imports into account, allows controlling for intra-industry trade and re-exporting I: Sectors and their numeric designations (SITC revision 3, Source: Widodo, 2008 flows; thus it is superior to the traditional BI index. The Lafay index values and the values of the net trade highly correlate (Gnidchenko and Salnikov, 2015). That is important, as net trade is considered the right indicator of comparative advantages in some theoretical frameworks and empirical studies (Leamer, 1984;de Ferranti et al, 2002).…”

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