Trade Intensity, Net Trade, and Revealed Comparative Advantage

More than a half a century ago, Bela Balassa proposed his famous revealed comparative advantage (RCA) index which represents the intensity of exports and can be represented as the ratio of actual-to-expected trade. Today, the index is still applied in the majority of empirical comparative advantage studies, though many alternative indices that account for the demand dimension by capturing imports have been proposed, and theoretical considerations indicate that a proper RCA index should be based on net trade. However, these alternatives cannot be represented as the ratio of actual-to-expected trade. We develop a new net trade RCA (ntRCA) index which estimates the comparative advantage from net trade and can be presented as the ratio of actual-to-expected net trade. The index is interpreted as the relative ability of a country to gain from trade in a certain product