SCHOOL OF ECONOMICS AND

BUSINESS, UNIVERSITY OF PORTO

1EC305: INTERNATIONAL TRADE

Chapter 1
The internationalization of economies
and firms: Indicators

The internationalization of economies

Can be detected at the level of

international trade but also at the
level of globalization through foreign
direct investment (FDI).

In the following approach we will focus

on trade flows.

International trade
indicators

The indicators most commonly used are

those which combine the flows of
exports and imports.

Unless we use a highly disaggregated

level of analysis, usually each country
tends to experience a double chain of
exchanges

simultaneous imports and exports for the

same product group.

International trade
indicators

Among several indicators proposed in

the literature, we choose those that
appear most relevant and which are the
most commonly used:
1) Openness indicator;
2) Coverage ratio and Trade balance to GDP
ratio;
3) Structural coefficients of exports or imports;
4) Revealed Comparative Advantages index;
5) Balassas specialization index

International trade
indicators
1) Openness indicator or Trade-to-GDP-ratio

This indicator measures a countrys openness or

integration in the world economy. It is the sum of
exports (X) and imports (X) divided by GDP (gross
domestic product):
X M
X
M
Openness

GDP
GDP

GDP

Export int ensity

Im port

penetration

Openness can be decomposed into two indicators:

export intensity (which shows the orientation of

domestic production to foreign markets and the
contribution of exports to GDP);
import penetration (which reflects the degree of
satisfaction of domestic demand through supplies from

International trade
indicators

Several factors influence the magnitude of the

openness indicator:

For example, international trade tends to be more important

(larger Openness) for small countries (in terms of
geographical size or population and surrounded by
neighboring countries with free trade schemes) than for
large economies (relatively self-sufficient or geographically
isolated and penalized by high transport costs).

Other factors that help explain differences in the

importance of international trade between countries are:
the structure of the economy (especially the weight of
non-tradable services in GDP);
re-exports and the presence of multinational
companies (which lead to high intrafirm trade).

International trade
indicators

Important note: the results for this indicator (Openness)

are not free of ambiguity since, among the group of
countries characterized by a large trade-to-GDP-ratio we
can find countries with very different structural features
(see Table I).
Table I

GDP

Exports

Imports

Opennes
s
(%)

Country A

2000

800

600

70%

Country B

2000

600

800

70%

Do the same value of the degree of

openness will have the same importance

International trade
indicators

Although both countries have equal Openness

indicator (0.7 or 70%), this openness conceals very
different situations:
The country A has a surplus of the trade balance
while country B has a negative trade balance.

Thus, it is necessary to combine the Openness

indicator with, for example, the coverage ratio or
the Trade balance to GDP ratio.

International trade
indicators
2) Coverage ratio (c):

It is a very simple indicator that shows the percentage of

imports that is covered by exports. It is defined by the ratio
between exports and imports:
c = X/M (or c=X/M*100)

A coverage ratio of more than 1 (or 100%) means that the

country has a strong commercial position (trade
competitiveness), while a ratio of less than 1 indicates a weak
position or trade dependence (negative trade balance ).

In evolutionary terms shows the relative dynamism of exports

and imports.

International trade
indicators

Important note: this indicator (Coverage ratio) should be

used with caution since it does not take into account the
weight (importance) of foreign trade in the national
economy (see Table II).

Table II

GDP

Exports

Imports

Coverage
ratio
(%)

Country A

1000

20

10

200%

Country B

1000

400

200

200%

Do the same value of the coverage ratio

will have the same importance for both

International trade
indicators

Industry coverage ratio (industry i):

ci = Xi/Mi
It

is a first indicator of sectoral competitiveness:

a value of ci greater than 1 indicates that
exports are greater than imports, reflecting
specialization in the sector, while a value smaller
than 1 represents a deficitary industry.

International trade
indicators

Normalized industry coverage ratio

Corresponds to the normalization of the industry coverage ratio

Xi
ci

Mi
M

When this indicator is greater than 1, the industry coverage

ratio is greater than the coverage ratio - hence meaning that
the sector is competitive.

If this indicator is inferior to 1, this means the sector is not

competitive, given that its (industry) coverage ratio is smaller
than the overall coverage ratio.

This indicator is especially useful for intertemporal comparisons

(see table 3).

International trade
indicators
Table 3: International trade total and of sector i in t and
in t+s
Country A
(million
euros)

Year t

Year t+s

Xi

500

400

Mi

250

600

1000

500

1000

1500

International trade
indicators
The evolution of the coverage ratio for sector i suggests a
strong reduction in the sectors competitiveness.
The sector went from having a superavit to a deficitary situation
(industry coverage ratio equals 2 and 2/3, respectively, for years t
and t+s).

Yet, the normalized industry coverage ratio shows stability

in the sectors competitiveness, when compared to the rest
of the economy.
Indeed, the indicator equals 2 in both years, given that the industry
coverage ratio had a behaviour perfectly parallel to the overall
coverage ratio (the latter diminished strongly between years t and
t+s, passing from 1 to 1/3.

The use of this indicator, together with the overall coverage

ratio, allows us to suggest that, in this case, the reduction in
competitiveness verified in sector i results from problems in
the economy as a whole, and not from specific problems
associated to this sector (i).

International trade
indicators

Trade balance to GDP ratio:

Is the difference between exports and imports divided by

GDP.
Trade balance to GDP = (X-M)/GDP

It is an indicator that allows highlighting countries which

had registered a surplus / deficit in the period of
reference.

The indicator is not a measure of openness to trade

because large flows of exports and imports can offset
each other and because the relative importance of trade
generally depends on the size of the country.

International trade
indicators
3) Structural coefficients of exports or imports

This analysis can be organized according to two approaches:

the composition of trade and the direction of trade
the composition of trade (which will identify which
products have the greatest weight in exports or imports). In
this way:
X ij
Xj

corresponds to the weight of exports of sector i in total exports

of country j.

M ij
M

represents the share of imports of sector i in total imports of

country j.

Structure of exports and

imports: the example of
Germany
Exports

Source: UN, International Trade Statistics

Yearbook 2014

Imports

Structure of exports and

imports: the example of
Portugal
Exports

Source: UN, International Trade Statistics

Yearbook 2014

Imports

International trade
indicators
3) Structural coefficients of exports or imports

X ij
Xj

M ij
Mj

the direction of trade (which allows identifying the

countries with the highest weight in terms of export
destination and source of imports). In this way:
corresponds to the share of exports directed to country i in total
exports of country j.

represents the share of imports originating in country i in total

imports of country j.

Direction of Portuguese
merchandise exports and imports
(Top 10), 2014
Exports
World
Spain

Thousands
%
Euros
48 177 135 100,0%
11 345 428 23,5%

France

5 636 382 11,7%

Germany
Angola
UK

5 632 464 11,7%

3 174 793 6,6%
2 927 620 6,1%

US

2 110 700

4,4%

Netherlands

1 915 804

4,0%

Italy
Belgium
China

1 565 540
1 302 597
838 798

3,2%
2,7%
1,7%

Imports
World
Spain
Germany
France
Italy
Netherlands
UK
Angola
China
Belgium
US

Source: INE

Thousands
Euros
58 853 826
19 128 303
7 272 478
4 160 233
3 080 666
3 007 420
1 794 280
1 605 746
1 597 205
1 564 578
920 216

%
100,00%
32,50%
12,36%
7,07%
5,23%
5,11%
3,05%
2,73%
2,71%
2,66%
1,56%

International trade
indicators
4) Revealed comparative advantage index
(RCA):

The revealed comparative advantage index (or normalized

market share) indicates how comparative advantages arise
'revealed', a posteriori, in the international trade statistics.
Xij
RCA

Xj

Xik
Xk

where
i: industry / sector of activity
j: country being analised
k: reference area (or country)

International trade
indicators

A country is defined to be relatively specialized in exports of a

particular product / sector if its market share in that product is
higher than the average

If the weight of the product in the country's exports is greater than

the weight that this product has on exports of the reference area.

If the index is greater than 1 means higher relative

specialization in sector i by country j than by country k.
So

we can say that if the indicator is above 1 country j 'reveals' a

comparative advantage in sector i.

A value less than 1 reflects a lower concentration of exports

of country j in sector i than by country k.
If

the indicator is less than 1, country j shows a comparative disadvantage

in sector i.

International trade
indicators
5) Balassas specialization coefficient (sector i)
bi

Xi Mi
Xi Mi

As the sectoral coverage ratio, this indicator helps to

distinguish the sectors in which the economy is specialized
(positive indicator) from sectors presenting deficit (negative
coefficient).
In fact, the Balassa coefficient can be calculated from the
Xi Mi
ci 1
coverage ratio:
bi

Xi Mi
ci 1
Balassa coefficient takes values between -1 and 1:
Extreme values of the coefficient corresponds to an
univocal specialization, exclusively importer and exporter,
respectively .

International trade
indicators

Balassas coefficient is also used to evaluate the

relative intensity of inter-industry versus intraindustry trade specialization:

If the coefficient has values close to -1, the country in

question has a weak competitive position in the sector i (Xi
tends to zero), while the coefficient approaching 1 means a
strong specialization (higher exports and insignificant
imports).

In both cases we are dealing with an inter-industry trade

specialization, reflecting the fact that the exchanges are largely
unidirectional: the sector is predominantly exporter or importer.

International trade
indicators

If the coefficient is close to zero, exports and imports are

equal and we are facing a pattern of intra-industry
specialization

If there are high volumes of both exports and imports (value

of Xi-Mi is reduced but that of Xi + Mi is high), it means that
we are in the presence of a strong intra-industry
specialization

by definition, high intra-industry trade means high levels of Xi and

Mi.

If Balassa coefficient is equal to 1/3 or -1/3 the sector

shows an equal level of intra-industry and inter-industry
trade

When the indicator moves away from one of these values

towards zero, the preponderance of intra-industry trade
increases, proportionally reducing the relevance of inter-

International trade
indicators

It should be noted that the results for

Balassa coefficient is highly dependent
on the adopted level of disaggregation

Excessive aggregation could show wrongly,

intra-industry trade. This will happen if for
statistical convenience structurally quite
distinct sectors (some predominantly exporters
and some predominantly importers) are
grouped.
It will thus be invalid any attempt to interpret
the specialization pattern by aggregating all
sectors of the economy.

Firms internationalization
indicators

UNCTAD - United Nations Conference on Trade and

Development uses the following three ratios as
indicators of the degree of firms foreign involvement:
- Foreign Assets / Total assets (A)
- Foreign Sales / Total Sales (S)
- Foreign Employment / Total employment (E)

To the extent that companies can differ greatly in

terms of each of the three indicators individually
considered, to assess the internationalization level of
firms, UNCTAD also uses the transnationality index
(TNI), which is obtained by average of three ratios
A S E
above:
TNI

Firms internationalization
indicators: example

Bibliography

Lapadre, P. (2001), Measuring

International Specialization, International
Advances in Economic Research, Vol. 7,
N2, pp.173-183.

UNCTAD (several years), World

Investment Report