Inferring comparative advantage via entropy maximization

Abstract

We revise the procedure proposed by Balassa to infer comparative advantage, which is a standard tool, in Economics, to analyze specialization (of countries, regions, etc.). Balassa's approach compares the export of a product for each country with what would be expected from a benchmark based on the total volumes of countries and products flows. Based on results in the literature, we show that the implementation of Balassa's idea generates a bias: the prescription of the maximum likelihood used to calculate the parameters of the benchmark model conflicts with the model's definition. Moreover, Balassa's approach does not implement any statistical validation. Hence, we propose an alternative procedure to overcome such a limitation, based upon the framework of entropy maximisation and implementing a proper test of hypothesis: the `key products' of a country are, now, the ones whose production is significantly larger than expected, under a null-model constraining the same amount of information employed by Balassa's approach. What we found is that countries diversification is always observed, regardless of the strictness of the validation procedure. Besides, the ranking of countries' fitness is only partially affected by the details of the validation scheme employed for the analysis while large differences are found to affect the rankings of products Complexities. The routine for implementing the entropy-based filtering procedures employed here is freely available through the official Python Package Index PyPI