Hello and welcome back. Today we will discuss three indicators that are often used in trade analysis. Balassa's index of revealed comparative advantage, the Herfindahl-Hirschman concentration index, and the Grubel Lloyd index that measures intra-industry trade. These indicators are part and parcel of the trade economists toolbox. At the end of this video, you will be able to apply these indicators and relate them to real-world trade issues. We start with the Balassa indicator for Revealed Comparative Advantage, or RCA. This indicator was developed by Bela Balassa, a leading economist who worked on the interface of trade and development. The indicator is used to get an idea of the comparative advantage of a country. This advantage is called revealed because we use the actually observed flows of goods and services and these flows may be disturbed by trade policies. RCA gives a reasonably good diagnosis, but may not always indicate the comparative advantages and disadvantages that would occur when we would have perfectly free trade. The mathematical expression for RCA is often a bit complicated, but I always simplify and use an expression in words. RCA is the ratio of two shares; the share of a product in the export of the country, divided by the share of the same product in world trade. If RCA is equal to one and the share of the product in the exports of a country is the same as its share in world trade, so we conclude that this country does not have a revealed comparative advantage or disadvantage for this product. When a share of a products in the country's export is larger than the world average, we have the RCA larger than one, and we conclude that the country has a revealed comparative advantage. For an RCA smaller than one, we have revealed comparative disadvantage. The next indicator that we will discuss is the Herfindahl-Hirschman Index or HHI. It is named after the natural resource economist Orris Herfindahl and a development economist, Albert Hirschman. This index, like the RCA uses shares. The HHI is defined as the sum of the squared shares. The index can be used to measure concentration in trade, for example, by country or by product. A higher HHI indicates more concentration. For example, for a monopoly, the market will be 100 percent or what amounts to the same, one. Or take another example, the export pattern. The share of country A is 50 percent, for country B, we have observed 30 percent, and for country C,20 percent. The HHI now becomes 0.5 squared plus 0.3 squared plus 0.2 squared. So that is 0.25, plus 0.09, plus 0.04, makes 0.38. The third index today measures intra-industry trade, and it was developed by the international trade economists Herb Grubel and Peter Lloyd. But beware, the equation that defines the Grubel Lloyd index is more complicated than the Balassa Index or the HHI. Here it is. X is the export of a specific product i. M is the import of that same product. So, we look for the same products that a country exports and imports. We can simplify the left-hand side, and then we derive the right-hand side. You can see that the Grubel Lloyd index is one minus a ratio. We can say something about the ratio. That will help you to understand intuitively what the value of the Grubel Lloyd index means. We can distinguish two extreme cases. The first case is the case of perfect comparative advantage. This means that the country either has a comparative advantage and then it exports the product, or it has a comparative disadvantage, and then it imports the good. Check that in both cases, the ratio becomes one, so that the Grubel Lloyd indicator is zero. The second case is a perfect intra industry example, where a country exports the same amount of a specific product as it imports. Now the ratio becomes zero so that the Grubel Lloyd index is one. Simply check this in the equation. These two cases are extremes. In reality, you will find the Grubel Lloyd index between zero and one. The lower the measure, the more the trade flows are driven by comparative advantage, and the higher the measurement, the more intra-industry trade occurs. It is also worth considering how these three indicators are related. For example, if the Grubel Lloyd indicator for a particular product increases, you would expect a decreasing share for trade based on comparative advantage. So wouldn't it be better to use only one indicator? It is of course true that more intra-industry trade is associated with a higher Grubel Lloyd and a lower RCA. But you need to think one step further. For example, what does it mean if the Grubel Lloyd indicator is constant but the RCA decreases? Indeed, it means that the reduction of the RCA then can not be due to increasing intra-industry trade. So, it must be something else. We need both indicators to make a better diagnosis. If the indicators point in the same direction, then you would have more confidence in the analysis. Diverging indicators tell you that you have to do more research. Indeed, it is always better to use different lenses to study international trade. In conclusion, the indicators that we discussed summarize data and trends in international trade and help us to understand such important issues as export diversification, the contribution of international value chains, and the comparative strength of sectors of the economy. The indicators provide different perspectives, allowing for a more comprehensive and robust analysis. That is a good basis for giving evidence-based policy advice.