Use of Trade Indices to Understand Trade Relations of Ecuador for Climate Smart Goods, Total Trade and Specialized Products

The following trade indices (along with their definition) have been used in this study for objective analysis of Ecuador's trade relations with its trading partners.

• Country's Share of World Exports It is the share of a country's total exports in the world's total exports. This ratio can be used to assess changing world market share of a country over time.

• Share of Product in Total Exports It is the share of each export product (at a chosen level of disaggregation) in the country's total exports.

• Share of Market in Total Exports It is the share of exports sold in each foreign country in the home country's total exports.

• Hirschman Herfindahl Index It is the sum of squared shares of each product in total export. A country with a perfectly diversified export portfolio will have an index close to zero, whereas a country which exports only one export will have a value of 1 (least diversified).

• Revealed Comparative Advantage Index Measures of revealed comparative advantage (RCA) have been used to help assess a country's export potential. The RCA indicates whether a country is in the process of extending the products in which it has a trade potential, as opposed to situations in which the number of products that can be competitively exported is static. It can also provide useful information about potential trade prospects with new partners. Countries with similar RCA profiles are unlikely to have high bilateral trade intensities unless intra-industry trade is involved. RCA measures, if estimated at high levels of product disaggregation, can focus attention on other nontraditional products that might be successfully exported. The RCA index of country I for product j is often measured by the product's share in the country's exports in relation to its share in world trade: RCA. = (x../X.) / (x /X ) Where x. and x . are the values of country i's

ij v ij ir v wj wt' ij wj '

exports of product j and world exports of product j and where Xit and Xwt refer to the country's total exports and world total exports. A value of less than unity implies that the country has a revealed comparative disadvantage in the product. Similarly, if the index exceeds unity, the country is said to have a revealed comparative advantage in the product. country's exports.

• Trade Intensity Index

The trade intensity index (T) is used to determine whether the value of trade between two countries is greater or smaller than would be expected on the basis of their importance in world trade. It is defined as the share of one country's exports going to a partner divided by the share of world exports going to the partner. It is calculated as:

Where xij and xwj are the values of country i's exports and of world exports to country j and where Xit and Xwt are country i's total exports and total world exports respectively. An index of more (less) than one indicates a bilateral trade flow that is larger (smaller) than expected, given the partner country's importance in world trade.

• Trade Complementarily Index

The trade complementarily (TC) index can provide useful information on prospects for intraregional trade in that it shows how well the structures of a country's imports and exports match. It also has the attraction that its values for countries considering the formation of a regional trade agreement can be compared with others that have formed or tried to form similar arrangements. The TC between countries k and j is defined as:

Where xij is the share of good i in global exports of country j and mik is the share of good i in all imports of country k . The index is zero when no goods are exported by one country or imported by the other and 100 when the export and import shares exactly match.

• Export Diversification (or Concentration) Index Export diversification is held to be important for developing countries because many developing countries are often highly dependent on relatively few primary commodities for their export earnings. Unstable prices for these commodities may subject a developing country exporter to serious terms of trade shocks. Since the covariation in individual commodity prices is less than perfect, diversification into new primary export products is generally viewed as a positive development. The strongest positive effects are normally associated with diversification into manufactured goods, and its benefits include higher and more stable export earnings, job creation and learning effects, and the development of new skills and infrastructure that would facilitate the development of even newer export products. The export diversification (DX) index for a country is defined as: DX = (sum |h - xi|) / 2 Where h is the share of commodity i in the total exports of country j and xi is the share of the commodity in world exports. The related measure used by UNCTAD is the concentration index or Hirschman (H) index, which is calculated using the shares of all three-digit products in a country's exports: H = sqrt [ sum (xvXt)2]Where xi is country j's exports of product i (at the three-digit classification) and X is country j's total exports. The index has been normalized to account for the number of actual three-digit products that could be exported. Thus, the maximum value of the index is 239 (the number of individual three-digit products in SITC revision 2), and its minimum (theoretical) value is zero, for a country with no exports. The lower the index, the less concentrated are a country's exports.

• Export Specialization Index The export specialization (ES) index is a slightly modified RCA index, in which the denominator is usually measured by specific markets or partners. It provides product information on revealed specialization in the export sector of a country and is calculated as the ratio of the share of a product in a country's total exports to the share of this product in imports to specific markets or partners rather than its share in world exports: ES = (x/Xtt) / (mkj/Mkt) Where and Xit are export values of country i in product j, respectively, and where mkj and Mkt are the import values of product j in market k and total imports in market k. The ES is similar to the RCA in that the value of the index less than unity indicates a comparative disadvantage and a value greater than one indicates advantage of producing and exporting into the identified markets.

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