Revealed Comparative Advantage

Abstract

Most models of international trade explain the commodity composition and direction of trade in terms of the law of comparative advantage: countries tend to export those goods which have the lowest relative costs (and therefore prices) under autarky. Different models focus on particular commodity characteristics and/or country characteristics to determine the pattern of relative autarkic costs; for instance technological factors in the case of the Ricardian model and factor intensity/endowment differences in the case of the Heckscher-Ohlin model. Indeed the concept of comparative advantage can be regarded as one of the triumphs of economic thought. It is logically irrefutable and widely accepted. It is also however a concept that is difficult to quantify and test directly: relative prices under autarky are not observable for countries that have long engaged in international trade, and even if they were the law does not imply a simple, deterministic relationship between comparative advantage and the volume of trade.

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