Industrial Strength Index Measurement Methodology How to use it! Detailed Measurement Steps

There are two common methods to examine the comparative advantage of a country's industry. One is to use the Net Trade Ratio (NTR) index to measure the comparative advantage of a country or region, which is expressed by the proportion of net exports to the import and export trade:

NTRki = (Xki-Mki)/(Xki+Mki) (1)

Where: X stands for exports, M stands for imports , i stands for country, and k stands for product classification. Since the NTR index only considers a country's exports and imports, and does not take into account the share of the world market (Share of the World Market, SWM) of the country's exports and imports, it cannot fully reflect the comparative advantage of a country's products.

The other is Revealed Comparative Advantage (RCA) proposed by Balassa. He argues that the revealed comparative advantage of country i's export product k is measured by the share of that product in the country's total exports relative to its share in world exports, i.e.

RCAkxi = (Xki/Xi)/(Wkx/W) (2)

Where: X stands for exports and W stands for world exports (or imports); i stands for the country, and k stands for the classification of the product. RCA index reflects the relative advantage of a country's exports of a product in comparison with the world's average level of exports, which eliminates the impact of fluctuations in the national aggregate and the world aggregate fluctuations, a better reflection of the product's relative advantage, so that since the 1980s, the index measurement method has been used as the most commonly used as a measure of comparative advantage of an indicator. It is generally recognized that if the RCA index is greater than 2.5, it has a strong competitive advantage; if it is less than 2.5 but greater than 1.25, it has a strong competitive advantage; if it is between 0.8 and 1.25, it has a medium competitive advantage; if it is less than 0.8, it has a weak competitive advantage.