The NPC compares a crop's different prices across borders.
The complex science of agricultural economics incorporates a variety of different numeric measures, including the nominal protection coefficient (NPC). The NPC evaluates prices -- nominal values -- to provide insight into trade policies -- protection.
Calculation
Each commodity has its own NPC. To calculate the NPC of a commodity, divide its domestic price by its "border price." Multiply the foreign price of the commodity by the exchange rate to find the border price.
Uses
Agricultural economists use the NPC to determine how well government policies incentivize the growing of specific crops, because government intervention causes the divergence between domestic and foreign prices. If the NPC of a crop is greater than 1 -- the domestic price is higher than the price on the international market -- then domestic producers have been given incentive to produce it.
Origin
Influential Scottish economist Adam Smith created the NPC during his analysis of the British Corn Laws. Smith included the NPC in the fourth book of "The Wealth of Nations," first published in 1776.
