Project Appraisal and Foreign Exchange Constraints: a Simple Exposition

20 Pages Posted: 28 Dec 2002

See all articles by Charles R. Blitzer

Charles R. Blitzer

Independent

Partha Dasgupta

University of Cambridge - Faculty of Economics and Politics; The Royal Swedish Academy of Sciences - Beijer International Institute of Ecological Economics

Joseph E. Stiglitz

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Date Written: February 1987

Abstract

In an earlier paper, we showed that the value of shadow prices depends on how the government contemplates re- equilibrating the economy to the perturbation associated with any project, except in the extreme case where the government has chosen all policy instruments optimally. Only under restrictive conditions will relative shadow prices for traded goods equal relative international prices. We develop here a general methodology for calculating shadow prices, which expresses the prices as a weighted average of domestic and international prices. The formulae provide the conditions under which the border price rule is valid. For instance, so long as there are non-traded goods, even if the government leaves tariffs unchanged (so that relative domestic prices of traded goods remain unchanged), unless the government completely neutralizes the induced change in domestic income, there will be changes in the prices of non-traded goods. These will preclude the use of the border price rule.

Suggested Citation

Blitzer, Charles R. and Dasgupta, Partha and Stiglitz, Joseph E., Project Appraisal and Foreign Exchange Constraints: a Simple Exposition (February 1987). NBER Working Paper No. w2165. Available at SSRN: https://ssrn.com/abstract=227381

Charles R. Blitzer

Independent

No Address Available

Partha Dasgupta

University of Cambridge - Faculty of Economics and Politics ( email )

Austin Robinson Building
Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom

The Royal Swedish Academy of Sciences - Beijer International Institute of Ecological Economics

The Royal Swedish Academy of Sciences
P.O. Box 50005
S-104 05 Stockholm, SE-104 05
SWEDEN

Joseph E. Stiglitz (Contact Author)

Columbia Business School - Finance and Economics ( email )

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814 Uris Hall
New York, NY 10027
United States
(212) 854-0671 (Phone)
(212) 662-8474 (Fax)

HOME PAGE: http://www.josephstiglitz.com

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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