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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.
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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.
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Possible Interpretations of RCA values:
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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.
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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.
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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.
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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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