5.1.5 First dimension: the supply side

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From the course by University of Geneva

Global Statistics - Composite Indices for International Comparisons

3 ratings

University of Geneva

Global Statistics - Composite Indices for International Comparisons

3 ratings

The number of composite indices that are constructed and used internationally is growing very fast; but whilst the complexity of quantitative techniques has increased dramatically, the education and training in this area has been dragging and lagging behind. As a consequence, these simple numbers, expected to synthesize quite complex issues, are often presented to the public and used in the political debate without proper emphasis on their intrinsic limitations and correct interpretations. In this course on global statistics, offered by the University of Geneva jointly with the ETH Zürich KOF, you will learn the general approach of constructing composite indices and some of resulting problems. We will discuss the technical properties, the internal structure (like aggregation, weighting, stability of time series), the primary data used and the variable selection methods. These concepts will be illustrated using a sample of the most popular composite indices. We will try to address not only statistical questions but also focus on the distinction between policy-, media- and paradigm-driven indicators.

From the lesson

Export Potential Assessment (ITC)

This module focuses on trade indices developed by the International Trade Centre, the Export Potential Index (EDI) and the Product Diversification index (PDI). Frictions often create a gap between what a country could export and what it does export to markets around the world. Trade advisers could better address these frictions and help firms realize greater exports if they knew exactly which products and markets offer best chances. During this week, you will learn about the Export Potential Assessment (EPI and PDI), which indicates products, sectors and markets for trade development activities for over 200 countries and 4,000 products. Based upon an assessment of the exporting country’s supply capacity, the target market’s demand and tariff conditions as well as the bilateral links between the exporting country and the target market, it provides a ranking of untapped opportunities.

5.1.1 Introduction1:12

5.1.2 Global overview of the export potential assessment3:58

5.1.3 Motivation and data treatment8:40

5.1.4 Economic framework4:06

5.1.5 First dimension: the supply side7:59

5.1.6 Second dimension: the demand side5:41

5.1.7 Third dimension: the bilateral trade relations, and results4:29

5.1.8 Aggregation and final indicator construction5:50

Meet the Instructors

Stefan Andreas Sperlich
Professor
GSEM, Research Center for Statistics
Juan Manuel Rodriguez Poo (in Partnership with UNIGE)
Professor
Departamento de Economía, Universidad de Cantabria

I will now present the ingredients of the supply side indicator in

our decomposition of the MPI indicator.

So, the supply side is actually a product of a number of sub-indicators.

First, we have so Balassa RCA, Revealed Comparative Advantage.

Then, we have dynamic factors that correspond to the growth of

that RCA as it was observed in the last years.

We have an indicator that takes into account

the trade surplus of that particular country for a product.

And eventually, we have

the global tariff disadvantage faced by the country in world markets.

So the Balassa RCA,

the really comparative advantage can be

interpreted two ways with exactly the same formula,

but we can see it as a ratio of the share of a product in

one country market to the share of that same product in world exports.

It can also be seen as the ratio of the market share of the country for that product,

divided by the market share of that country for all products.

So actually, it's just the same but by just combining things differently.

When the RCA is below one,

it mean that, the country is not specialized in that particular product.

When it's above one then it means this country

has revealed comparative advantage in exporting that product.

Though, if we consider an example for leather shoes,

Indonesia exports a little more than $2 million of leather shoes,

which is very little as compared to world exports which is approximately $60 million.

However, for Indonesia as

these two millions correspond to more than one percent of their total exports.

Whereas at world level,

these 60 millions are much less than one percent.

And for that reason we can conclude that Indonesia has

a comparative advantage in exporting leather shoes.

So, in addition to using the Balassa RCA,

we also consider the growth of these RCA. Why do we do that?

We compute how much this RCA has,

how it has evolved between two sub-periods.

Because we have seen by doing some econometrical work

that actually there is a continuation of this evolution.

So, when we have had in the last five years a growth of the RCA,

we can expect that there should be no the growth in the coming years.

But actually it's not that these will continue just exactly at the same pace.

Were the econometrics says is that a small share with

more fraction of the growth that has been observed

in the past will continue in the future.

And this is what we take into consideration.

So, for example, if we have Ethiopia,

RCA that has grown by 90 percent over the last five years,

what we can expect is that there should be on

average 23 percent further growth in the next five years.

So we apply these to our dynamic factors.

For extreme growth rates,

very large growth rates,

or very small growth rates,

we don't exceed range of 0.73 to 156,

just because out of range,

we have seen that the econometrics results were not reliable anymore.

A third component is the export to import ratio.

Why do we consider this ratio?

Actually some products can consist of re-exports.

A country imports a good and re-exports it with very little or no change at all.

Then, we will not consider that this country has

a real comparative advantage is that good.

So, to fix this problem,

what we do is that we correct the RCA for the export-to-import ratio of the product,

whenever these export-to-import ratio is below one.

When it's above one, we don't do anything.

So here an example,

we have the Netherlands that imports $6.8 million of fruits and nuts,

and they export six 6.1 million.

So there is a possibility that part of these exports consists of we exported goods.

For that reason we compute the ratio 6.1 divided by 6.8,

and we will multiply our RCA by the ratio.

Eventually, the last component is a global tariff disadvantage.

We compare the average tariffs that a country faces,

when exported particular good in the world with

what all suppliers in the world face when they export that good to the same countries.

And we will use these ratios,

these comparison to correct the RCA.

When we see that a country has a global tariff advantage in world market,

we will consider that the off you needs to be downgraded.

And on the contrary,

if the country has overall a tariff disadvantage,

then its RCA has to be upgraded.

Why? Because if the RCA is based on actual trade data.

So actual trade data are already

taking stock of the fact that the country faces a tariff advantage or not.

If the country manages to export

goods just because this country has a tariff advantage in the world,

then it's actual comparative advantage is lower than it seems,

than it is reviewed by trade data.

So, if a country manages to export

despite the fact that this country faces a tariff disadvantage in the world, then,

it means that in a market where tariff conditions are better

this country could be actually even more successful than the RCA,

the Balassa RCA indicates, and by contrast,

if the country manages to expose only thanks to

these tariff advantage that it has

overall in a market where there is no tariff advantage,

then we should not expect that these countries

be necessarily as successful as in other markets.

So this is why we need to apply these correction factor.

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