Chapter 2 Part II

Bases for Specialization

 REVIEW:
 Trade concepts
 Autarky or no trade
 With trade

 Three trade theories

 Absolute cost advantage (Adam Smith)
 Comparative cost advantage (David Ricardo)
 Comparative advantage (John Stuart Mill)

 The limits to mutually beneficial trade is

determined by pre-trade domestic ratios in each
country
 Absolute cost advantage
No trade
COUNTRY OUTPUT LABOR INPUT (man-hours)
Rice Silk Total Rice Silk Total
Philippines 1 1 2 20 40 60
Japan 1 1 2 30 10 40
Total 2 2 4 50 50 100

With trade
COUNTRY OUTPUT LABOR INPUT (man-hours)
Rice Silk Total Rice Silk Total
Philippines 1+1 0 2 20 + 20 0 40
Japan 0 1+1 2 0 10 + 10 20
Total 2 2 4 40 20 60
 Comparative cost advantage
No trade
COUNTRY OUTPUT LABOR INPUT (man-hours)
Rice Silk Total Rice Silk Total
Philippines 1 1 2 20 40 60
Japan 1 1 2 15 10 25
Total 2 2 4 35 50 85

With trade
COUNTRY OUTPUT LABOR INPUT (man-hours)
Rice Silk Total Rice Silk Total
Philippines 1+1 0 2 20 + 20 0 40
Japan 0 1+1 2 0 10 + 10 20
Total 2 2 4 40 20 60
 Comparative advantage
COUNTRY LABOR INPUT POSSIBLE PHYSICAL OUTPUT
(man-hours) Rice Silk
Philippines 200 100 50
Japan 200 200 150

 On the basis of comparative advantage:

 XRP and MSP
 XSJ and MRJ
 But, what is the physical exchange ratio between
Japan and the Philippines? Is it still 1R:1S?
 Limits to Mutually Beneficial Trade
0.50S is the minimum amount of silk that
the Philippines is willing to accept in
Minimum limit exchange for a unit of rice export. 0.60S?
0.50S 0.40S?

1R
Maximum limit 0.75S is the maximum amount that Japan
is willing to give up in exchange for a unit
0.75S of rice imports. 0.80S? 0.70S?

(1) If the domestic exchange ratio for both countries is 1R:1S,

what will happen? Will there be trade?
(2) If the actual exchange ratio is 0.5R:0.5S, what will the
Philippines and Japan do to production and trade of both goods?
 Principle of opportunity cost
 Cost of the best foregone alternative
 The value to an individual of the next best thing that
must given up to get the item
 Example: Instead of attending this class, what is the
next best thing for you?
Comparative advantage & opportunity cost
COUNTRY POSSIBLE PHYSICAL OUTPUT
Rice Silk
Philippines 100 50
Japan 200 150

COUNTRY OPPORTUNITY COST

Rice Silk
Philippines 100 2 50 0.5
= =
50 1 100 1
Japan 200 1.33 150 0.75
= =
150 1 200 1

To produce 1 unit of silk, the Philippines will have to give-up 2 units of rice.

Countries will specialize and trade the goods which it has LOWER
OPPORTUNITY COST.
 Domestic Resource Cost
 Concept was initially developed by
Michael Bruno (1967), “The Optimal
Selection of Export-Promoting and
Import-Substituting Projects”
 Basic idea: how to identify
commodities with comparative
advantage in export and import
substitution
 Basic Framework

Factors of
Production or Commodities External
Inputs or Outputs Factors
• Land • Crops EXPORT? • Price of Output
• Labor • Livestock or Border Price
• Capital • Poultry • Foreign
• Natural • Fisheries Exchange Rate
Resources • Imported
• Manage- Inputs
ment

Domestic Economy International

IMPORT? Trade
IMPORT
SUBSTITUTION?
 Domestic Resource Cost
 Domestic resource cost (DRC) is an indicator of how
efficiently a production activity earns or saves
foreign exchange.
 Earns forex through export
 Saves forex through import substitution
𝑷
 Unit is in
𝑼𝑼𝑼

 Reflects the “own exchange rate” of the activity

 Domestic Resource Cost
Formal Definition:
𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝑐𝑐𝑐𝑐 𝑝𝑝𝑝 𝑢𝑢𝑢𝑢 𝑜𝑜 𝑜𝑜𝑜𝑜𝑜𝑜
𝐷𝐷𝐷 =
𝑊𝑊𝑊𝑊𝑊 𝑝𝑝𝑝𝑝𝑝 − 𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝑐𝑐𝑐𝑐 𝑝𝑝𝑝 𝑢𝑢𝑢𝑢

Simplified Definition:
𝐶𝐶𝐶𝐶 𝑜𝑜 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 (𝑃𝑃𝑃𝑃)
𝐷𝐷𝐷 =
𝑅𝑅𝑅𝑅𝑅𝑅𝑅 𝑜𝑜 𝑡𝑡𝑡𝑡𝑡𝑡 𝑜𝑜𝑜𝑜𝑜𝑜 𝑈𝑈𝑈 − 𝐶𝐶𝐶𝐶 𝑜𝑜 𝑡𝑡𝑡𝑡𝑡𝑡 𝑖𝑖𝑖𝑖𝑖𝑖 (𝑈𝑈𝑈)

𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁 𝒄𝒄𝒄𝒄 𝑜𝑜 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 (𝑃𝑃𝑃𝑃)

𝐷𝐷𝐷 =
𝑇𝑇𝑇𝑇𝑇𝑇 𝒊𝒊𝒊𝒊𝒊𝒊 𝑜𝑜 𝒔𝒔𝒔𝒔𝒔𝒔𝒔 𝑈𝑈𝑈
 Domestic Resource Cost
𝐶𝐶𝐶𝐶 𝑜𝑜 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 (𝑃𝑃𝑃𝑃)
𝐷𝐷𝐷 =
𝑅𝑅𝑅𝑅𝑅𝑅𝑅 𝑜𝑜 𝑡𝑡𝑡𝑡𝑡𝑡 𝑜𝑜𝑜𝑜𝑜𝑜 𝑈𝑈𝑈 − 𝐶𝐶𝐶𝐶 𝑜𝑜 𝑡𝑡𝑡𝑡𝑡𝑡 𝑖𝑖𝑖𝑖𝑖𝑖 (𝑈𝑈𝑈)

𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁 𝒄𝒄𝒄𝒄 𝑜𝑜 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 (𝑃𝑃𝑃𝑃)

𝐷𝐷𝐷 =
𝑇𝑇𝑇𝑇𝑇𝑇 𝒊𝒊𝒊𝒊𝒊𝒊 𝑜𝑜 𝒔𝒔𝒔𝒔𝒔𝒔𝒔 𝑈𝑈𝑈

TRADE SCENARIO DOMESTIC RESOURCE

COST OF RICE (P/US$)
Export 50.42
Import Substitution 26.71

Interpretations:
 P50.42/US$ → In order to earn 1 unit of foreign exchange in export,
the country will have to spend P50.42 worth of domestic resources.
 P26.71/US$ → In order to save 1 unit of foreign exchange by
substituting domestic production with imports, the country will have to
spend P26.71 worth of domestic resources.
 Domestic Resource Cost
Interpretation under export trade scenario:

 P50.42/US$ → In order to earn 1 unit of foreign exchange in

export, the country will have to spend P50.42 worth of domestic
resources.

 What is the equivalent of 1 unit of foreign exchange?

 Will have to get the foreign exchange rate (forex).

 e.g. forex of P47.00/US$

 Earning = P47.00 VS Domestic Cost = P50.42

 Does the activity have comparative advantage in export?

 Domestic Resource Cost
Interpretation under import substitution trade scenario:

 P26.71/US$ → In order to save 1 unit of foreign exchange by

substituting domestic production with imports, the country will
have to spend P26.71 worth of domestic resources.

 What is the equivalent of 1 unit of foreign exchange?

 e.g. forex of P47.00/US$

 Saving = P47.00 (Cost of import) VS Domestic Cost =

P26.71 (Cost of domestic production)

 Does the activity have comparative advantage in import

substitution?
 Resource Cost Ratio
 These two complicated rules can be represented by a
measure called resource cost ratio (RCR).
𝑫𝑫𝑫
 𝑹𝑹𝑹 =
𝑺𝑺𝑺

 where SER is the shadow exchange rate

 SER is the “free market” exchange rate or the exchange
rate without the effects of market failure & government
intervention
 Resource Cost Ratio
 Comparative advantage conditions:
𝑫𝑫𝑫
 𝑹𝑹𝑹 = <1 comparative advantage
𝑺𝑺𝑺

𝑫𝑫𝑫
 𝑹𝑹𝑹 = =1 neutral
𝑺𝑺𝑺

𝑫𝑫𝑫
 𝑹𝑹𝑹 = >1 comparative disadvantage
𝑺𝑺𝑺
 REVIEW:
 DRC - indicator of efficiency of a production
activity
 Earns foreign exchange through export
 Saves foreign exchange through import substitution
𝑷
 Unit is in → “own exchange rate” of the activity
𝑼𝑼𝑼

𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁 𝒄𝒄𝒄𝒄 𝑜𝑜 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 (𝑃𝑃𝑃𝑃)

𝐷𝐷𝐷 =
𝑇𝑇𝑇𝑇𝑇𝑇 𝒊𝒊𝒊𝒊𝒊𝒊 𝑜𝑜 𝒔𝒔𝒔𝒔𝒔𝒔𝒔 𝑈𝑈𝑈

 New Topic: Two indicators of efficiency

 Comparative advantage
 Competitive advantage
 Comparative & competitive advantage
 Comparative advantage – efficiency under FREE
MARKET conditions
 Competitive advantage – efficiency under ACTUAL
MARKET conditions
 Comparative and competitive advantage could be
expected to merge into one measure, if there are:
 Absence of market failures;
 E.g. monopoly, barriers to entry and exit, imperfect information

 Absence of government interventions.

 E.g. taxes, subsidies, price controls, tariffs, sanitary requirements
Comparative & competitive advantage
Without market failure &
With market failure & with
without government
government intervention
intervention

MEASURE COMPARATIVE COMPETITIVE

ADVANTAGE ADVANTAGE
1) Domestic Use of: Use of:
Resource Cost and • social prices or • private or actual
2) Resource Cost social opportunity prices
Ratio costs • official exchange
• shadow exchange rate
rate
 DRC and RCR Calculations
1. Construct farm enterprise budgets. Add
marketing costs up to port.
Profitability of prawn production and processing, Negros Occidental, 1996
ITEM VALUE
Yield (kg/ha) 3,620
Price of output (P/kg)
Farmgate 197.75
Wholesale 325.00
Return (P/ha) Processing Costs (P/ha)
Farm level 715,855
Wholesale level 1,176,500
Cartons 44,258
Plastic containers 2,387
Production Costs (P/ha)
Fry 58,166 Plastic strap 564
Fertilizer Ice 78
A P (18-46-0) 137 Other containers 4,145
Urea (46-0-0) 121
Complete (14-14-14) 693
Transportation 859
Chicken manure 710 Labor cost 14,945
Feeds Repair and maintenance 108
Pre-starter 18,800
Starter 34,073
Land tax 104
Grower 83,427 Building tax 208
Finisher 88,788 Electricity 4,426
Teaseed powder 2,245
Telephone 338
Lime 4,790
Vitamin supplement 810 Fuel 281
A ntibiotics 5,278 Oil 58
Transportation 968
Office supplies 104
Labor cost 57,140
Repair and maintenance 101,346 Interest expenses 1,321
Land tax 5,770 Depreciation 883
Electricity 46,973 Total Processing Costs 75,067
Fuel 16,748
Oil 3,430 Net Farm Income (P/ha) 165,449
Interest expenses 7,267
Depreciation 12,728 Net Wholesale Income (P/ha) 551,027
Total Production Costs 550,406
 DRC and RCR Calculations
1. Construct farm enterprise budgets. Add
marketing costs up to port.
2. Allocate actual costs into domestic factors and
foreign components.
 Decomposition Procedure
 In practice, decomposition is a formidable task,
requiring careful examination of trade data.
 Time
 Money

 Sources of info on cost allocations

 Trade statistics (Yearbooks and online)
 Expert’s opinion (e.g. industry associations)
 Sample Allocation Table
COST ALLOCATION
COST ITEM
Domestic Foreign
SEEDS/PLANTING Rice 90 10
MATERIALS Corn-Native 100 0
Corn-Hybrid 80 20
Durian 90 10
Mango 90 10
Dendribium 70 30
Seaweeds 100 0
FERTILIZERS Urea 30 70
Complete 30 70

FARM CHEMICALS 30 70

VET PRODUCTS 30 70
 Sample Allocation Table
COST ALLOCATION
COST ITEM
Domestic Foreign
PACKAGING Carton Box-for export 0 100
Carton-local made 60 40
Kaing 100 0
BREEDS/FINGERLINGS Day old chicks-brolier 75 25
Day old chicks-layer 75 25
FEEDS Corn 90 10
Soybeans 20 80
Soybean Meal 20 80
LABOR 100 0
ROAD TRANSPORT 70 30
DRY STORAGE 90 10
COLD STORAGE 70 30
LAND 100 0
 ALLOCATION OF ACTUAL COSTS
ITEM ACTUAL ALLOCATION COST ALLOCATION
COSTS Domestic Foreign Domestic Foreign
Production Costs (P/ha)
Fry 49,478 100 0 49,478
Fertilizer
A P (18-46-0) 254 0 100 254
Urea (46-0-0) 259 0 100 259
Complete (14-14-14) 362 0 100 362
Chicken manure 370 100 0 370
Feeds 217,089 60 40 130,253 86,836
Teaseed powder 2,283 100 0 2,283
Lime 3,810 100 0 3,810
A ntibiotics 1,651 0 100 1,651
Vitamin supplement 4,954 0 100 4,954
Transportation 792 100 0 792
Labor 67,132 100 0 67,132
Repair and maintenance 91,130 21 79 19,101 72,029
Land tax 4,819 100 0 4,819
Electricity 51,803 100 0 51,803
Fuel 11,362 0 100 11,362
Oil 2,327 0 100 2,327
Interest expenses 6,435 100 0 6,435
Depreciation 14,066 24 76 3,338 10,728
 DRC and RCR Calculations
1. Construct farm enterprise budgets. Add
marketing costs up to port.
2. Allocate actual costs into domestic factors and
foreign components.
3. Convert actual costs into economic costs. Do the
same allocation procedure [subsidy and tariff].
CONVERSION OF ACTUAL TO ECONOMIC COSTS, AND ALLOCATION

ITEM ACTUAL ECONOMIC COST ALLOCATION

COSTS COSTS Domestic Foreign
Production Costs (P/ha)
Fry 49,478 49,478 49,478
Fertilizer
A P (18-46-0) 254 266 266
Urea (46-0-0) 259 251 251
Complete (14-14-14) 362 386 386
Chicken manure 370 370 370
Feeds 217,089 197,354 118,412 78,941
Teaseed powder 2,283 2,283 2,283
Lime 3,810 3,810 3,810
A ntibiotics 1,651 1,603 1,603
Vitamin supplement 4,954 4,809 4,809
Transportation 792 792 792
Labor 67,132 67,132 67,132
Repair and maintenance 91,130 84,582 17,728 66,853
Land tax 4,819 4,819 4,819
Electricity 51,803 51,803 51,803
Fuel 11,362 8,300 8,300
Oil 2,327 2,235 2,235
Interest expenses 6,435 6,435 6,435
Depreciation 14,066 13,091 3,106 9,984
 DRC and RCR Calculations
1. Construct farm enterprise budgets. Add
marketing costs up to port.
2. Allocate actual costs into domestic factors and
foreign components.
3. Convert actual costs into economic costs. Do the
same allocation procedure.
4. Get estimates of border price and exchange rate.
 Border Price
- FOB for exports (yellow corn from US = US$160/mt)
- CIF for imports (cost + insurance + freight = 160 +
56 + 8 = US$224/mt)
- Sources
+ trade statistics (implicit world prices)
+ quotes from a major international market (e.g.
World Bank Pink Sheet)
 Exchange Rate
- rate at which domestic currency can be converted
into another currency
- In the Philippines before 1997, peso was
overvalued (OER = 26.33 VS SER = 31.596)
- After 1997, peso was devalued (more or less
OER=SER)
- Main source (Bangko Sental ng Pilipinas)
 DRC and RCR Calculations
1. Construct farm enterprise budgets. Add
marketing costs up to port.
2. Allocate actual costs into domestic factors and
foreign components.
3. Convert actual costs into economic costs. Do the
same allocation procedure.
4. Get estimates of border price and exchange rate.
5. Estimate the DRC and RCR.
 Estimate DRC and RCR

A. Domestic Resource Cost

- for per hectare numeraire

domestic cost component of budget (P/ha)

DRC = -------------------------------------------------------------------
border price x yield - foreign cost component of
(US$/mt) (mt/ha) budget (P/ha)
--------------------------------------
official exchange rate (P/US$)
 Estimate DRC and RCR

A. Domestic Resource Cost

- for per kilogram numeraire

domestic cost component of budget (P/kg)

DRC = -------------------------------------------------------------------
border price - foreign cost component of
(US$/kg) budget (P/kg)
--------------------------------------
official exchange rate (P/US$)
 Estimate DRC and RCR

B. Resource Cost Ratio

- formula

DRC*
RCR = --------------------
Exchange Rate**
* Valued at opportunity costs for comparative advantage,
and actual costs for competitive advantage
** SER for comparative advantage, and OER for
competitive advantage
Comparative & Competitive Advantage
of Prawn, Export Trade Scenario
ITEM COMPETITIVE COMPARATIVE
Border Price (US$/kg) 12.34 12.34
Yield (kg/ha) 3,620 3,620
Official Exchange Rate (P/US$) 26.33 26.33
Shadow Exchange Rate (P/US$) 31.596 31.596
Domestic Costs (P/ha) 399,801 383,069
Foreign Costs (P/ha) 175,441 160,235
Total Costs (P/ha) 575,242 543,303
DRC (P/US$) 10.52 9.93
RCR 0.40 0.31
 DRC and RCR Calculations
1. Construct farm enterprise budgets. Add
marketing costs up to port.
2. Allocate actual costs into domestic factors and
foreign components.
3. Convert actual costs into economic costs. Do the
same allocation procedure.
4. Get estimates of border price and exchange rate.
5. Estimate the DRC and RCR.
6. Do sensitivity analysis. [DRC and RCR are static
measures]
 Sensitivity Analysis
ITEM COMPETITIVE
Border Price (US$/kg) 12.34
Yield (kg/ha) 3,620
Official Exchange Rate (P/US$) 26.33
Shadow Exchange Rate (P/US$) 31.596
Domestic Costs (P/ha) 399,801
Foreign Costs (P/ha) 175,441
Total Costs (P/ha) 575,242
DRC (P/US$) 10.52
RCR 0.40
Break-even indicators
Break-even yield (kg/ha) 1,770
Break-even border price (US$/kg) 6.04
 Price Comparisons
 Measurement of competitiveness using output prices
 Competitive advantage (actual prices) vs comparative
advantage (shadow prices)
 Focus is on price of output, not prices of factors of
production
 Export: Export price VS domestic wholesale price
 Import substitution: Import price VS domestic wholesale
price
 Price Comparisons
 Competitive advantage conditions:
𝑬𝑬𝑬𝑬𝑬𝑬 𝒑𝒑𝒑𝒑𝒑𝒑 𝒑𝒑𝒑𝒑𝒑
 > 1 competitive advantage
𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫 𝒘𝒘𝒘𝒘𝒘𝒘𝒘𝒘𝒘 𝒑𝒑𝒑𝒑𝒑

𝑰𝑰𝒑𝒑𝒑𝒑 𝒑𝒑𝒑𝒑𝒑𝒑 𝒑𝒑𝒑𝒑𝒑

 > 1 competitive advantage
𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫 𝒘𝒘𝒘𝒘𝒘𝒘𝒘𝒘𝒘 𝒑𝒑𝒑𝒑𝒑
 Export parity price

Domestic wholesale price

RICE: Price Competitiveness under Export Trade
Scenario, Manila, 2013
ITEM VALUE
FOB Price, Thailand, 25% brokens (US$/mt) 487
Times foreign exchange rate (P/US$) 42.17
Equals Export Price (P/mt) 20,537
Less
Handling and margin (P/mt) 2,027
Transport, port to wholesale (P/mt) 709
Equals derived export wholesale price (P/mt, Manila) 17,801

Actual domestic wholesale price (P/mt, Manila) 30,630

Export Parity Price Ratio 0.58

Price competitiveness exists if the export parity price ratio is greater than one.
Basic sources of data: World Bank, 2013; Bangko Sentral ng Pilipinas, 2013;
and Bureau of Agricultural Statistics, 2013.
 Import parity price
Domestic wholesale price
 RICE: Price Competitiveness under Import
Substitution Trade Scenario, Cabanatuan, 2013
TARIFF RATE
ITEM
40% 35% 15% 0
In US$/mt
FOB Price, Thailand, 25% brokens 487 487 487 487
+ Freight and insurance 48 48 48 48
= CIF Manila 535 535 535 535
In P/mt (P42.17/US$)
= CIF Manila 22,561 22,561 22,561 22,561
+ Tariff 9,024 7,896 3,384 0
+ Handling and margin 2,027 2,027 2,027 2,027
+ Distribution cost (Manila to Cabanatuan) 3,018 3,018 3,018 3,018
= Derived import wholesale price (P/mt, Cabanatuan) 36,630 35,502 30,990 27,606

Actual domestic wholesale price (P/mt, Cabanatuan) 29,865 29,865 29,865 29,865

Import Parity Price Ratio 1.23 1.19 1.04 0.92

Price competitiveness exists if the import parity price ratio is greater than one.
Basic sources of data: World Bank, 2013; Bangko Sentral ng Pilipinas, 2013;
and Bureau of Agricultural Statistics, 2013.
 Revealed Comparative Advantage
 Used in the assessment of a country’s potential for
exporting a commodity
 Indicates the relative advantage or disadvantage of
countries in in exports

General Formula:
𝑋𝑖𝑖 𝑋𝑛𝑛 where:
RCA = � X is exports
𝑋𝑖𝑖 𝑋𝑛𝑛
i is country index
n is set of commodities
j is commodity index
t is set of commodities
 Revealed Comparative Advantage
 Example: RCA of the Philippines in sugar production

𝑽𝑽𝑽𝑽𝑽 𝒐𝒐 𝑷𝑷𝑷𝑷 𝑺𝑺𝑺𝑺𝑺 𝑬𝑬𝑬𝑬𝑬𝑬

𝑽𝑽𝑽𝑽𝑽 𝒐𝒐 𝑷𝑷𝑷𝑷 𝑻𝑻𝑻𝑻𝑻 𝑬𝑬𝑬𝑬𝑬𝑬 (𝑨𝑨𝑨 𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪)
RCA =
𝑽𝑽𝑽𝑽𝑽 𝒐𝒐 𝑾𝑾𝑾𝑾𝑾 𝑺𝑺𝑺𝑺𝑺 𝑬𝑬𝑬𝑬𝑬𝑬
𝑽𝑽𝑽𝑽𝑽 𝒐𝒐 𝑾𝑾𝑾𝑾𝑾 𝑻𝑻𝑻𝑻𝑻 𝑬𝑬𝑬𝑬𝑬𝑬 (𝑨𝑨𝑨 𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪)

 RCA conditions:
 𝑹𝑹𝑹 < 1 comparative disadvantage
 𝑹𝑹𝑨 = 1 neutral
 𝑹𝑹𝑨 > 1 comparative advantage
RCA of Selected Agricultural Products (2011)

Commodity INDO MAL PHIL THAI VIET

15 Vegetable fats and oils 17.7 16.7 5.0 0.5 0.2
16 Meat, fish and seafood 1.5 0.3 2.5 13.2 4.6
prep’ns
17 Sugar and sugar 0.3 0.5 3.3 6.1 0.3
confections
18 Cocoa and cocoa prep’ns 2.8 2.5 0.0 0.2 0.0
19 Cereal four and milk 0.9 2.0 0.9 1.4 0.7
prep’ns
20 Vegetable and fruit 0.4 0.2 2.9 3.0 0.5
40 Rubber and products 5.6 3.6 0.7 7.7 1.9

Source of basic data: www.trademap.org

 SUMMARY:
 DRC - indicator of efficiency of a production
activity
 Earns foreign exchange through export
 Saves foreign exchange through import substitution

 Two indicators of efficiency

 Comparative advantage (uses opportunity costs and SER)
 Competitive advantage (uses actual costs and OER)

 Price comparison
 Competitiveness in terms of price of output
 Export price vs domestic wholesale price
 Import price vs domestic wholesale price

 Revealed comparative advantage

 comparative advantage in export