Comparative advantage is the single most widely used indicator for measuring a country’s international trade performance. A country is considered to have a comparative advantage in the production of certain goods if it has low relative cost in the production of that good compared to other countries. This paper revealed comparative advantage (RCA) for seven major economies that contributed about 80% of global manufacturing exports. According to business literature, a country’s standard of living and a firm’s profit depend on competitive advantage. On the other hand, economics literature suggests that while it may be desirable to have an absolute advantage in the production of goods, it is the comparative advantage that is vital in explaining trade patterns.
There are two theories to explain patterns of trade: comparative advantage and increasing returns to scale. Comparative advantage occurs due to differences across countries in factor endowment or technology, whereas returns to scale is related to a country’s size (returns to scale), market structure (with imperfect competition), and location (with trade costs). While estimation of comparative advantage at a single point in time is important, a deeper understanding of trade dynamics requires the knowledge of how these advantages are changing over time.
Suggested by: Nur Fathin Mohd Khalil (Statistician, DOSM)
