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Revealed Comparative Advantage

The Revealed Comparative Advantage (RCA) is a trade analysis tool to measure and assess the competitive advantage of the product which the business people need to export. The RCA indicates whether a country's product is in the process of extending the products in which it has a trade potential or simply competitive advantage.

The Revealed Comparative Advantage (RCA) is defined as a country's sectoral share divided by the world sectoral share. The values of an RCA indicate the country's competitiveness vis-a-vis the world. It also helps to assess a country's export potential.


    

   

       
   

   


 

Where s is the country of interest, d and w are the set of all countries in the world, i is the sector of interest, x is the commodity export flow and X is the total export flow. The numerator is the share of good i in the exports of country s, while the denominator is the share of good i in the exports ofthe world.
      

Possible Interpretations of RCA values:

  1. A value of less than unity implied that the country has a revealed comparative disadvantage in the product. However for a company to take a decision on the basis of the RCA values, a small value of RCA could also mean lesser domestic players from the country in question exporting that particular product and could mean an opportunity for the start up SME firms.
  2. A RCA value is greater than 1 for a certain product signifies that the country has exported that commodity more intensively than the rest of the world in that year and generally this is taken as a proxy measure of a country's competitiveness. On the other word, it indicated that if the index exceeds unity, the country is said to have a revealed comparative advantage in the product.
  3. A fluctuating values of RCA across the years could mean a strict government policy interventions/control or else a fluctuating demand in the certain influential traditional markets for that product.
  4. A sudden rise in the RCA value could be due to possibility of innovation in terms of product or process or design etc. It could also be an indication of a recent announced export subsidy or incentive on that product giving a sudden flip to the product export.

 

 

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