Benefit-Cost Analysis: Financial and Economic Appraisal Using Spreadsheets

By Harry F. Campbell; Richard P. C. Brown | Go to book overview

8
Valuing Traded and Non-traded Commodities in
Benefit-Cost Analysis

Introduction

A project undertaken in an open economy may result in changes in the flows of goods and services which are exported or imported. It is not important whether the actual output of the project is exported, or the actual inputs imported. If the output is a traded commodity (a commodity which the country exchanges in international trade) it may be exported or it may replace imports; similarly, if the inputs are traded commodities they may be imported or they may come from domestic sources which are replaced by increased imports or reduced exports. The changes in international trade flows resulting from the project need to be valued, and the prices which measure the benefit or cost to the economy of changes in exports or imports are international prices.

Projects which involve outputs or inputs of traded commodities are likely also to involve outputs and inputs of non-traded commodities (goods and services which are not involved in the country's international trade), and these non-traded commodities are valued at domestic prices. The benefit-cost analysis of such projects requires comparisons of values of traded and non-traded goods. This poses two problems: first, since traded good prices are denominated in foreign currency (often US$) and non-traded good prices are denominated in domestic currency, an exchange rate is required to convert from one to the other; and, second, the domestic price structure differs from the international price structure, and benefits and costs must be valued under the same price structure if they are to be compared.


Traded and Non-traded Goods

We start this discussion of the distinction between traded and non-traded goods by considering a broader distinction – that between tradeable and non-tradeable goods. A tradeable good or service is one that is capable of being traded in international markets. Many commodities are tradeable – steel, cement, wheat, consulting services etc. The main reason some commodities are non-tradeable is that they have high international transport costs relative to their production cost. For example, services such as haircuts are non-tradeable because no one is willing to pay the cost of travelling abroad to get a haircut; perishables such as fresh bread and milk are non-tradeable because of the high cost of keeping them fresh while they are being transported; and bulky commodities such as sand and gravel are non-tradeable because of high transport costs relative to their market prices. The fact that cost is the key factor in

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