Measuring the comparative advantage of agricultural activities: Domestic resource costs and the social cost-benefit ratio

The Domestic Resource Cost (DRC) indicator is widely used in developing countries to measure comparative advantage and guide policy reforms. In this paper we demonstrate that the DRC formula is biased against activities that rely heavily on domestic factors (land and labor), and that a simple Social Cost-Benefit (SCB) ratio is a generally superior measure of social profitability. The SCB uses the same data as the DRC in a formula which does not distort profitability rankings. The policy significance of improved measurement is shown using data from Kenya, where the DRC overstates the relative profitability of activities using large amounts of tradable inputs.