Crop Production/Industries, Environmental Economics and Policy,

Aghae, M.

Najarzadeh, Reza

Reed, Michael R.

Rezagholizadeh, M.

Saghaian, Sayed H.

English

Research Papers in Economics

Title of the Poster: 
A Study of Iran’s Comparative Advantage in Saffron, the Red Gold 
 
 
 
Authors 
Author Affiliation and Contact Information 
Najarzadeh, R., M. Reed, S. Saghaian, M. Aghae, and M. Rezagholizadeh 
Najarzadeh is an assistant professor at the Tarbiat Modares University of Iran and a 
visiting professor at the University of Kentucky, Department of Agricultural Economics. 
Reed is a professor and Saghaian is an associate professor both at the University of 
Kentucky, Department of Agricultural Economics. Aghae & Rezagholizadeh are Ph.D. 
students in economics at the Tarbiat Modares University of Iran.  
 
 
 
Poster prepared for presentation at the Agricultural & Applied Economics 
Association 2010-04-30 AAEA,CAES, & WAEA Joint Annual Meeting, Denver, 
Colorado, July 25-27, 2010 
 
 
Copyright 2010 by {authors}. All rights reserved. Readers may make verbatim 
copies of this document for non-commercial purposes by any means, provided that 
this copyright notice appears on all such copies. A Study of Iran’s Comparative Advantage in Saffron, the Red Gold
Najarzadeh, R., M. Reed, S. Saghaian, M. Aghae, and M. Rezagholizadeh
Najarzadeh is an assistant professor at the Tarbiat Modares University of Iran and a visiting professor at the University of Kentucky, Department of Agricultural Economics. Reed is a 
professor and Saghaian is an associate professor both at the University of Kentucky, Department of Agricultural Economics. Aghae & Rezagholizadeh are Ph.D. students in 
economics at the Tarbiat Modares University of Iran. 
Conclusion
In this research, we studied the comparative 
advantage and export potentials of saffron, known 
as Iranian red gold. The results, based on the 
comparative advantage indices, including DRC and 
UCs, indicate that Iran has a comparative 
advantage in the production of saffron. Moreover, 
the nominal rate of protection on saffron shows that 
there has been an indirect tax on saffron 
production during the period of study. In other 
words government agricultural policies as a whole 
have penalized saffron growers.
The elasticity analyses show that a 10% increase 
in the world price of saffron and Iranian Rial would 
improve the Domestic Resource Cost Index of 
saffron by 0.67%. The value of the competitiveness 
index, based on export prices, was estimated to be 
0.333, which shows that Iranian saffron farmers 
can compete in the world markets. Based on these 
results the amount of land allocated to saffron 
production in Iran should be increased. The 
geography and the climate conditions of Iran and 
market conditions call for such a move. Joining the 
WTO should benefit saffron growers because Iran 
has a comfortable comparative advantage in 
saffron production. 
Also, since saffron is produced in provinces where 
people on the average earn less income than the 
rest of the population, the expansion of saffron 
production is recommended to reduce poverty, 
especially because saffron production does not 
require any sophisticated or advanced technology. 
Since K is -24,700,000 Rials this implies that the 
market or private prices for non-tradable inputs are 
less than their shadow prices and so the producers 
receive an indirect subsidy for such inputs. In other 
words the government actions have caused a 68% 
cost reduction for the producer.
According to Table 2, J is -1,180,000 Rials; the 
market costs of tradable inputs to the producer are 
lower than their shadow or social costs for these 
inputs. Thus saffron producers are receiving a 57 % 
subsidy on tradable inputs.
The producer’s profit at market prices, D, is 
13,560,000 Rials, so saffron production at current 
market conditions is profitable. Profit at shadow 
prices (H) are also positive and equal 5,630,000 
Rials, so we can say that saffron production is 
profitable at shadow prices too. Since L > 0  we 
conclude that saffron production at market prices is 
more profitable than at shadow prices. Thus the 
subsidies on saffron more than compensate for the 
taxes.
increased domestic production of saffron costs 0.87 while 
generating 1.00 in income from the international market, 
which implies that Iran has a comparative advantage in 
saffron production. The UC index is also less than one which 
implies that saffron production is profitable given current 
market prices. Therefore, with UCs equal to 0.88, Iran would 
have a comparative advantage in saffron under competitive 
conditions (the situation that Iran will move towards when it 
becomes a member of WTO and shadow prices prevail in the 
country). The fact that NSP is positive indicates that the 
production of saffron is socially profitable.
Introduction
Iran is OPEC’s second largest oil producing 
country, but has been trying to join the World 
Trade Organization (WTO) in order to expand 
non-oil exports. Among the non-oil exports, 
agricultural products play a major role in the 
Iranian economy.            Among the 
agricultural products exported from Iran, 
saffron is a key product. With a production of 
about 170 tons of saffron annually  Iran is the 
number one producer of saffron in the world. 
Many third party countries, such as Spain & 
France use fancy packaging  to re-export 
Iranian saffron from their countries with higher 
added value and price. Peculiarities: Saffron 
does not require much water for cultivation. 
And once it is planted it can be picked 
(harvested) for many seasons. The flower, 
which is the valuable part of the plant, can be 
picked up to seven consecutive seasons. 
Saffron itself can be stored for many years 
without loosing its quality. Also, the 
transportation of saffron is rather easy and 
does not require heavy machinery. Since 
saffron is used in producing certain medicines 
and preparing different fancy dishes around 
the world, it earns its producers hard 
currency. Moreover, since saffron does not 
require any high-tech farming machinery for 
its production, it can easily provide 
employment in the agricultural sector. 
Methodology 
Comparative advantage plays an important role in  
bilateral trade among different countries. Measures of 
comparative advantage are:
1-Domestic Resource Costs (DRC),
2-Revealed Comparative Advantage (RCA), 
3-Net Present Value (NPV),
4-Profitability Index (PI), 
5- Social Benefit Cost Ratio (SBC).
However, applied individually, these indices only cover 
part of the comparative advantage phenomenon.  
To overcome this shortcoming, we have used a policy 
analysis matrix ( PAM ) to study the competitiveness of 
saffron production in Iran. PAM provides a framework 
through which we can compute the comparative 
advantage index, the protection coefficients and the cost 
competitiveness index simultaneously. These measures 
can be used to assess the impact of globalization on 
economic units. PAM can also be utilized to analyze the 
economic policies of the government and offer ways to 
improve them.        
Table 1 presents a PAM matrix 
as was first presented by Monke & Pearson (1987) and 
was later modified by Masters & Winter Nelson (1995). 
The first row shows the revenue of a firm (A), the cost of 
tradable inputs (B), the cost of the non-tradable inputs (C) 
and the domestic profitability (D) matrices.  The second 
row consists of the same matrices as the first row except 
that the computations performed use shadow prices both 
for the products and the inputs. The third row is obtained 
by subtracting the elements of the second row from the 
first row. This row is used to analyze government policies. 
As it is evident from the 
elements of the matrix in Table 1, we need to compute the 
shadow prices of three main groups: the non-tradable 
inputs, the tradable inputs, and the exchange rates. 
Shadow prices reflect the real social cost of the resources 
used in producing a product. This is important because in 
many developing countries resource prices are distorted 
by government interventions. If the social profit H >0, this 
implies that the industry in question has a comparative 
advantage. But a negative H implies a waste or misusing 
of resources. 
Revenue  Tradable 
Resources
Non-
Tradable 
Resources
Profit 
Private 
Prices
A B C D
Social 
Prices
E F G H
Effects of 
Divergence
s
I J K L
PAM for 
the output 
of one 
hectare 
saffron 
plantation 
2008 
(Rials)
Revenue  Tradable 
Resource
s
Non-
Tradable 
Resource
s
Profit 
Private 
Prices
29500000 1340000 14600000 13560000
Social 
Prices
47450000 2520000 39300000 5630000
Effects of 
Divergenc
es
17950000 -1180000 -
24700000
7930000
Comparative 
Advantage Indexes
Abbreviation Value
Based on Domestic 
factors 
DRC 0.87
Based on unit costs UC5 0.88
Net social profit NSP 5630000
Computing the Indices in a PAM Framework
Table 3 shows the values for the three 
Comparative Advantage Indices associated with 
saffron production:
The DRC is 0.87. So at social prices,
Table 2 shows an estimated policy analysis matrix for 
saffron. The revenue from one hectare of saffron based on 
shadow prices is 17,950,000 Rials more than the revenue 
for the same amount of saffron based on market prices.    
Therefore, we can claim that a 40% tax has been imposed 
on saffron production.

A Study of Iran’s Comparative Advantage in Saffron, the Red Gold

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