An Alternative Approach to Measure Regional Comparative Advantage in China’s Grain Sector

Abstract

Domestic Resource Costs (DRC) are widely used to measure comparative advantages in production of any commodity in a country. Basically, the DRC measures the opportunity costs of producing specified goods with reference to border prices for both inputs, especially imported and/or tradable, and outputs. Once a foreign exchange rate is chosen, a Domestic Resource Costs Coefficient (DRCC) can be obtained by dividing the DRC with the exchange rate. If the value of DRCC equals one, then the opportunity costs of domestic production is exactly the same as the costs of imports, or the foreign currency earned from exports. If that value is less than one, it implies that domestic production costs are less than imports. However, there is a departure from classical Ricardo’s theory of comparative advantage in the above approach. A Ricardian model requires comparing production of two goods between two countries, without counting domestic output prices and exchange rate. A country may have DRCC values higher than one for two or more products, which means it has comparative disadvantages in all these produts. However, it must have comparative advantage in at least one product. The same argument applies to measuring regional comparative advantages within a country. Therefore, in this study, the ranks, i.e., the relative values, rather than the absolute values, of DRCCs of will be taken as indicators of regional comparative advantages in grain production among provinces in China. The ranks of the DRCCs of various grain crops within any specific province, which suggest the relative comparative advantages in producing various grain crops in a province, rather than the relative comparative advantages of various provinces in producing a specific grain crop will be used to show the direction of structural adjustment. Obviously the two indicators are both important in measuring China’s regional comparative advantages in grain production, and a province’s comparative advantages in producing various crops may be more important in determining the direction of structural adjustment in that province.