Delta Economics Trade Indicator Definitions

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1 Delta Economics Trade Indicator Definitions

2 Contents Page page Trade Indicator Definitions Section 1 of 6 3 Trade Openness Index (TOI) Net Trade Openness Index (NTOI) Normalised Revealed Comparative Advantage (NRCA) Trade Indicator Definitions Section 2 of 6 4 Revealed Market Access (RMA) Export Specialisation Index (NESI) Export Diversification Index (EDI) Trade Indicator Definitions Section 3 of 6 5 Finger-Kreinin Index (FKI) Sector Finger-Kreinin Index (FKI) Sector-Country Flow Trade Indicator Definitions Section 4 of 6 6 Trade Complementarity Index (TCI) Intra-Industry Trade (IIT) Trade Intensity Index (TII) Trade Indicator Definitions Section 5 of 6 7 Concentration Ratio (CR) Herfindahl Hirschman Index (HHI) Comprehensive Concentration Index (CCI) Trade Indicator Definitions Section 6 of 6 8 Hall-Tideman Index (HTI) Contact Delta Economics Information 9 page 2

3 Trade Indicator Definitions Section 1 of 6 Trade Openness Index (TOI) The Trade Openness Index (TOI) is a ratio which measures the value of trade conducted by a country (Exports plus Imports) over its current GDP. The measure is usually based on a scale from 0 to 1. A value closer to 1 (or above) suggests that international trade factors highly within the nation s GDP profile; and a value closer to 0 indicates that trade does not feature highly within the country s GDP profile. Note that a low ratio is not necessarily indicative of high barriers to trade; it may also be due to factors such as the size of economy and/or geographic remoteness from their trading partners. TOI = (x+m)/gdp where x = total exports, m = total imports Net Trade Openness Index (NTOI) The Net Trade Openness Index (NTOI) assesses the net-drag on a country s GDP: it measures the size of the trade balance (surplus or deficit) as a share of the country s GDP. Countries that exhibit strong current account surpluses tend to have, on average, lower domestic demand and a higher saving rate. Countries that exhibit a current account deficit tend to have higher consumption levels and a lower saving rate. For instance, lower values (around or below zero) suggest that a country is importing more than it is exporting, whereas a larger value suggests an economy has a more export-led focus. NTOI = (x-m)/gdp where x = total exports, m = total imports Normalised Revealed Comparative Advantage (NRCA) The Normalised Revealed Comparative Advantage (NRCA) assesses the competitiveness of a country s trade portfolio. It uses trade flows to measure the relative advantage or disadvantage of a given country in a certain class of goods or services. A comparative advantage is present or revealed if the NRCA value is near or around the value of (1). A value of close or near (0) indicates a comparative disadvantage in the commodity or industry. RCAik = (Xik / k Xik) / (Xwk / k Xwk) where xik = country i s exports of product k, and xwk = world exports of product k NRCA = RCA - 1 / RCA + 1 page 3

4 Trade Indicator Definitions Section 2 of 6 Revealed Market Access (RMA) The RMA ratio compares the level of market access into a given country against the level of access into a comparator country. The value is derived by dividing the Bilateral Normalised Revealed Comparative Advantage (BilNRCA) by the NRCA. The Bilateral NRCA gives an indication of how much a country is exporting to a particular market versus how much the world is exporting to that market. A value below 1 (<1) is not penetrating the market at the rate that would be expected according to its (N)RCA ; whereas, an RMA greater than 1 (>1) suggests market access for the given good is better than its (N)RCA. There is greater incentive for a country to gain entry into a given market and therefore set up bilateral trade when it has a comparative advantage against a partner country. RMAik = {(Xikr/ k Xikr)/(Swkr/ k Swkr} / {(Xikw/ k Xikw)/(Xwk/ k Xwk)} where xikr = country i s export of product k to country r ; swkr = world s exports of product k to country r; xikw = country i s export of product k to world; xwk = world s exports of product k Export Specialisation Index (NESI) The (N)ESI is a modification of the NRCA, where the export specialisation index gives information on revealed specialisation in the export segment of the economy. It is the ratio of the share of a product in a country s total exports to the share of imports to that specific market rather than its share in world exports. For this index, the values are normalised so if the ESI is less than 1, this indicates specialisation in the market while a value nearer to 0 implies comparative disadvantage in the export sector. ESI = (Xij/Xit) / (Mkj/Mkt) Export Diversification Index (EDI) Export Diversification Index (EDI) measures how exports are spread across a country s total export profile. EDI examines whether a given country (or group of countries) structure of exports (or imports) of products differs from the world s average structure of exports (or imports). It ranges from 0 to 1, where 1 indicates a larger variation from the world average, or the absolute deviation of a country share from the global structure. EDI = hij-hi /2 page 4

5 Trade Indicator Definitions Section 3 of 6 Finger-Kreinin Index (FKI) Sector The FKI (Sector) index measures the similarity between the trade flow distributions of two (or more) nations. Here we use Net Exports to omit any production sharing that might take place between countries, which need not mean the two are competing against one another. FKI values usually range between 1, which indicates perfect similarity and 0, which implies both nations have structurally different export portfolios. There are occasions when values exceed this range: it could be that the numerator changed (net exports of the sector) or that the denominator changed (trade balance). Over time these values will either diverge, meaning they are exporting different goods; or converge, meaning they are becoming more alike in their export profiles. NetFKI = (NXik/NTXi), (NXjk/NTXj) i=country k=product j = partner country Finger-Kreinin Index (FKI) Sector-Country Flow The FKI (Sector-Country) index measures the similarity between the trade flow distributions to a given market (final destination). It is used to gauge the overlap between export distributions by commodity group of any two countries (country #1, country #2) to a given market (country #3). The results for FKI usually range from zero to one, where 1 indicates perfect similarity they export the same type of goods, and where it is 0, this implies both nations have structurally different export portfolios. FKI = 1- [(0.5) g XACgt/ gxajgt - XBCgt/ gxbcgt ] Where, A=Australia, B=Brazil, C=China (market), g=product, t= time (XACgt/ gxacgt) is the share of product g in total exports from Australia to China. (XBCgt/ gxbcgt) is the share of product g in total exports from Brazil going to China. page 5

6 Trade Indicator Definitions Section 4 of 6 Trade Complementarity Index (TCI) The TCI is an overlap index which shows how well the structure of a country s export-supply matches another country s import-demand of a certain product/sector, and thus delineates how positive prospects for trade between them are in the form of Regional Trade Agreements. TCI looks at whether the two nations stand to gain by trading with each other when one has a comparative disadvantage in products which the other has a comparative advantage. A high degree of complementarity suggests more favourable prospects for a successful trade arrangement. A maximum percentage of 100% shows that the two nations are ideal trading partners. A lower score indicates that there is not much scope for trade between them. Changes in the TCI over time look at whether the two nations trade profiles are becoming more or less compatible. TCI = 100*[1 - ( Mik Xij )/2] Intra-Industry Trade (IIT) The intra-industry trade indicator measures the degree of overlap of exports and imports, in other words, a two-way trade in similar products. It takes place if a country imports as well as exports the same type of goods. The Grubel Lloyd (GL) measure is most commonly used to calculate IIT. The value of the GL index usually ranges between 0 and around the 1 mark, where the former (0) denotes zero intraindustry trade and the latter (1) or in some cases above (>1) corresponds to the situation where all trade is intra-industry. IIT = 1- [ Xjk-Mjk /(Xjk+Mjk) Trade Intensity Index (TII) The Trade Intensity Index determines the value of trade between two countries based on its relative importance in world trade. In other words, it determines whether a region exports more, (as a percentage), to a given destination as compared to the exports of the world to that destination. In essence, it is the share of one country s exports going to a partner divided by the share of world exports going to that partner. TIIij = (Xij/TXi) / (Xwj/TXw) page 6

7 Trade Indicator Definitions Section 5 of 6 Concentration Ratio (CR) The concentration ratio CR is a measure of the concentration share held by N-sectors within a country s export portfolio. A low concentration ratio indicates that a country s export portfolio comprises a greater variety of goods, whereas a ratio nearing 1 (100%) means that only one type of product (for instance, oil) makes up a large part of a county s export profile. CR = Si where i = 1, 2,..., n ; s = shares of export Herfindahl Hirschman Index (HHI) The Herfindahl-Hirschmann Index is used to calculate the number of equivalent sized export industries that a nation has in its export profile. It is an important calculation for determining pricing for a company s (exporting) goods or service. It differs from the Concentration Ratio in that it places a higher value on the top exporter good that have the largest market share. Values can range from between 0 to 1(100%), where a higher value indicates a greater concentration of exports within a smaller number of products. HHI = si^2 where i = 1, 2,..., n; s = shares of export OR Hj = sqrt [ (xi/xt)2], where xi = country j s exports of product I, Xt = country j s total exports Comprehensive Concentration Index (CCI) The Comprehensive Concentration Index is another measure of market concentration, but this time the index reflects both relative dispersion and absolute magnitude of the export categories involved. As with the Hall-Tideman Index, the CCI requires the export share is to be sorted in descending order. However, its main focus is on the largest share of export of a specific category. It gives the value 1 in the case of high concentration by one product/sector. CCI = S1 + Si^2 (2 Si) page 7

8 Trade Indicator Definitions Section 6 of 6 Hall-Tideman Index (HTI) The Hall-Tideman Index (HTI) is another measure of concentration. However, this index goes a step further than HHI, to include the number of export categories in its calculation. It also takes into consideration smaller exporting sectors which are given larger weightings (and influence) overall in the summation. The measure usually ranges from 0 to 1. A result close to zero means that there are an infinite number of equally sized exporting categories; and where it is unity, or 1 (or above), there is a high export concentration or monopoly by one sector. HTI =1/2 isi-1 page 8

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