Potential and Realized Trade Patterns: The Case of Sweden

Abstract

Observations of the trade pattern between countries have been used as a method to infer in what industries or commodities a country has comparative advantage. The method was introduced by Balassa (1965) and named the comparative (RCA) approach. The approach arose from difficulties in measuring an industry's actual comparative advantage in production and trade. Given the difficulties in (1) accounting for all the factors which influence an industry's comparative advantage, and (2) actually measuring and comparing these factors between countries and industries, Balassa argued that the revealed performance of an industry's trade pattern would serve as a reasonably adequate indicator of that industry's comparative advantage. More specifically, the RCA approach argues that if a country's share in world exports of a particular good is greater than its overall share in total world exports, then the country has a revealed comparative advantage in exporting that good. Such a revealed comparative advantage should also appear as a tendency towards a positive trade balance for that good, that is, an export/import ratio in excess of unity. Balassa argued that export/import ratios would be more influenced by protectionist measures than relative export shares, and hence the latter would be more reliable indicators of comparative advantage. Balassa consequently gave more weight to relative export shares as measures of comparative advantage. Since Balassa (1965), this method has been used by e.g. Hirsch (1974), Parry (1975), Donges & Riedel (1976) and Balassa (1977). It should be obvious that the theoretical foundation of the approach is less satisfactory. In the international trade literature, there exist several definitions of the concept of comparative advantage. It seems that the most adequate definition for theoretical purposes is that a country has compara-