Foreign Exchange Equivalence and Project Appraisal Procedures
This paper investigates the implications of different adjustment mechanisms for shadow pricing traded and nontraded goods in a flexible price model. A foreign exchange equivalent rule that can be readily adapted whatever the adjustment mechanism is derived. It is shown that traded commodities are always valued at border prices and nontraded commodities can always be shadow priced in terms of changes in production and consumption of traded goods valued at border prices. The role of the shadow exchange rate and the implications for measuring the balance of payments effect when no tax adjustment policy is assumed are also discussed. Copyright 1990 by Royal Economic Society.