Revealed Comparative Advantage and Contribution-to-the-Trade-Balance indexes

This paper examines the conceptualization of Revealed Comparative Advantage (RCA) indexes as Contribution-to-the-Trade-Balance (CTB) indexes based on a comparison between the actual and expected trade balances. We first present existing CTB indexes and explain their theoretical robustness. We next discuss alternative normalization processes of CTB indexes centered around total GDP or GDP per capita. In addition, as CTB indexes are additive applications of the Kunimoto-Vollrath principle, we examine the conceptualization of CTB indexes as multiplicative applications of this principle. Lastly, the option of computing CTB indexes using adjusted trade flows is considered. Ultimately, sixteen CTB indexes are evaluated using a sample of thirty-six trade areas according to time stationarity, symmetric distribution, extreme value frequency and ordinal ranking bias. An additive CTB index computed with or without adjusted trade flows and with normalization by total trade and GDP per capita provides the best measures.