The domestic resource cost concept: Theory and an empirical application to the case of Spain

The problem of how to make an optimum use of a country's limited productive resources is often a crucial one to the policy makers in less developed countries (LDCs). Not surprisingly, therefore, the various methods of cost-benefit analysis have attracted much attention among professional economists and are finding a wide spread application in evaluating the social profitability of investment projects and in the planning decision-making process as well. Relatively less attention has been paid to yet another criterion of project appraisal in a developing country that has been developed independently of social cost benefit analysis - the so called domestic resource cost (DRC) approach to project appraisals. This approach is properly regarded as the application of the propositions of allocation theory when the project, or the industry in question, produces (or saves) foreign exchange. The DRC concept compares the opportunity costs of domestic resources (primary factors such as labour, capital, land) conmitted to the production of final goods with prices at which these goods can be exported or imported - the latter prices (the foreign exchange gained or saved) being considered as the ensuing benefits from production. The rationale for using the foreign exchange gained (through exports) or saved (through imports) as a standard of reference is that foreign exchange is relatively, and often critically, scarce in many developing countries.