A Closer Look at Revealed Comparative Advantage: Gross-versus Value Added Trade Flows

With the availability of international value added trade data it has become evident that gross export data and value added data do not provide the same information. Although gross exports crosses national borders and is the target of trade policy, value added data tell us what fragment in the production chain is internationally competitive in a particular country. With respect to comparative advantage the differences between the two types of data are often illustrated by means of examples using a single sector. In the Ricardian theory of comparative advantage, however, the position of a commodity versus all other commodities in a country determines whether or not a sector has a comparative (dis)-advantage. This implies that distributions of comparative advantage of all sectors should be compared and not just individual sectors. In this paper we determine the distributions of Revealed Comparative Advantage (RCA) in terms of gross exports and value added for 40 countries. A Systematic comparison of these distributions shows that the distributions of RCA calculated with gross exports and value added data are indeed significantly different from each other. After establishing these significant differences we use the Great Recession as an example to determine which RCA measure has the largest information content regarding the real economy. We find that RCA calculated with value added data is the most telling.