Application of Gravity Model: Measurement of International Competitiveness of Trade in Services

By Lei, Wang | Studies in Sociology of Science, December 1, 2011 | Go to article overview
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Application of Gravity Model: Measurement of International Competitiveness of Trade in Services


Lei, Wang, Studies in Sociology of Science


1.THE ANALYSIS OF THE EXISTING TRADE COMPETITIVE INDEX

Reviewing the studies of trade competition, two indexes are usually applied. One is Revealed Comparative Advantage Indices (RCA), and the other is Trade Special Coefficient (TSC).

1.1 RCA

The original Revealed Comparative Advantage Indices is put forward by Balassa in 1965. The concept of revealed comparative advantage is grounded inconventional trade theory. It can be written as,

[RCA.sub.ij] = [X.sub.ij]/[X.sub.i]/[X.sub.wj]/[X.sub.w] (1)

where x represents exports, i is a country, j is a kind of merchandise export, t is all kinds of merchandise export, and w is all of the countries, [RCA.sub.ij] is based on observed trade patterns; it measures a country's merchandise export relative to its total exports and to the corresponding export performance of total countries.

RCA presents a kind of industry comparative advantage of a country exports comparing with world average exports performance. After excluding the impact of the total exports tolerance from a country and world total exports tolerance, RCA could show a better representative. Different values of RCA indices have different meaning in the study of trade in services.

1.2 TSC

The other trade competition index is TSC, which is a major analysis tool applied on industry structure international competition. It could present comparative advantage of calculated objects.

TSC = [E.sub.ij] - [I.sub.ij] / [E.sub.ij] + [I.sub.ij]

Where i is a country, j is a commodity, E represents exports, I represents imports, TSC index could only be set within range of values, which are between -1 and 1.If TSC>0, then the country i belongs net export country of commodity j, and has strong competition on exporting commodity j. If TSC<0, then the country i belongs net import country of commodity j, and has weak competition on exporting commodity j. has If TSC=0, then division of export and import are balance. It presents country i not only export commodity j but also import commodity j. If TSC=-1, then country i only import commodity j. If TSC=1, then country I only export and does not import commodity j.

1.3 Detailed Introduction About RCA&TSC

Revealed Comparative Advantage Index is used to analyze the comparative advantage of one industry export based on comparing a country trade structure and world trade structure. Time Series could be applied to show the country trade structure and the world trade structure difference at the different time points. It could provide dynamic analysis output and comparative outputs of trade competitiveness. This technology is sensible measure. However, Cross Section Series method could present consistent world trade structure level at the same time point. Therefore, RCA could only represent different trade structure among different countries. This comparative analysis could not express comparative advantage principle. At the same time, the comparative analysis could not present dynamic comparison. It is not suitable to be a major analysis index of expressing trade competition.

Trade Special Coefficient is used to analyze relationship between total trade and net trade of special industry based on the level of import and export trade. It could represent not only dynamic time series character but also static cross section series character based on series study. Moreover, TSC could present the ability of a country trade development. If a country wants to occupy an important place in world trade in services, its total trade own high share in total world trade. If the occupancy ratio is low, the country has little trade in services benefit and weak impact. This country has potential trade growth development space. It could not push or control the whole international trade in services market changing. Therefore, it is not suitable to only use TSC to measure trade competitiveness.

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Application of Gravity Model: Measurement of International Competitiveness of Trade in Services
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