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Cost-Benefit Analysis for Investment Decisions: Chapter 9 (The Shadow Price of Foreign Exchange and Non-Tradable Outlays)

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Author Info

  • Glenn Jenkins

    (Queen's University, Canada and Eastern Mediterranean University, Cyprus)

  • Chun-Yan Kuo

    (Queen's University, Canada)

  • Arnold C. Harberger

    (University of California, Los Angeles, USA)

Abstract

The economic cost of capital, as measured in Chapter 8, deals with the intertemporal comparisons. It links the annual flows of benefits and costs over a project's life to its initial capital investment. In the present chapter we deal with another facet of the act of raising project funds from the country's capital market. This facet concerns the distortions that are affected not intertemporally but at the same moment that the funds are raised. Investment and consumption expenditures by others in the market are displaced by the very act of raising the project's funds in the capital market. As a consequence, the government loses tariff revenue plus value added and other indirect taxes. These losses must be counted in the economic evaluation of any project, in addition to those linked to the spending of project funds on tradable or non-tradable goods and services, and in addition to the intertemporal distortions captured by the economic opportunity cost of capital. The existence of these indirect taxes on domestic and trade transactions, the economic value of foreign exchange differs from the market exchange rate and there will be a tax externality associated with expenditures on nontradables. This chapter has provided an analytical framework and a practical approach to the measurement of the economic cost of foreign exchange and the shadow price of non-tradable outlays.

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Bibliographic Info

Paper provided by JDI Executive Programs in its series Development Discussion Papers with number 2011-09.

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Length: 45 pages
Date of creation: Aug 2011
Date of revision:
Handle: RePEc:qed:dpaper:202

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Keywords: foreign exchange; economic cost of non-tradable outlays;

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References

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  1. Arnold C Harberger & Glenn P Jenkins & Chun-Yan Kuo & M Benjamin Mphahlele, 2003. "The Economic Cost of Foreign Exchange for South Africa," South African Journal of Economics, Economic Society of South Africa, vol. 71(2), pages 155-169, 06.
  2. Bacha, Edmar & Taylor, Lance, 1971. "Foreign Exchange Shadow Prices: A Critical Review of Current Theories," The Quarterly Journal of Economics, MIT Press, vol. 85(2), pages 197-224, May.
  3. Dinwiddy,Caroline L. & Teal,Francis J., 1996. "Principles of Cost-Benefit Analysis for Developing Countries," Cambridge Books, Cambridge University Press, number 9780521479165, October.
  4. Glenn P. Jenkins & Chun-Yan Kuo, 1985. "On Measuring the Social Opportunity Cost of Foreign Exchange," Canadian Journal of Economics, Canadian Economics Association, vol. 18(2), pages 400-415, May.
  5. Fane, George, 1991. "The Social Opportunity Cost of Foreign Exchange: A Partial Defence of Harberger et al," The Economic Record, The Economic Society of Australia, vol. 67(199), pages 307-16, December.
  6. Glenn Jenkins & Chun-Yan Kuo, 1998. "Estimation Of The National Parameters For Economic Cost-Benfit Analysis For The Philippines," Development Discussion Papers 1998-04, JDI Executive Programs.
  7. Warr, Peter G, 1977. "Shadow Pricing with Policy Constraints," The Economic Record, The Economic Society of Australia, vol. 53(142&143), pages 149-66, June-Sept.
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