Catalog

	Table of Contents
p. 16 of 74 BACK | NEXT I. Introduction II. Background III. The Economic Rationale of A Project IV. Macroeconomic and Sectoral Context V. An Integrated Approach To Economic Analysis VI. Identification and Quantification of Costs and Benefits VII. Valuation of Economic Costs and Benefits A. General Considerations B. Role of World Prices C. Economic Prices of Traded Goods and Services D. Economic Prices of Nontraded Goods and Services E. The Economic Price of Labor F. The Economic Price of Land G. Bringing Economic Prices To A Common Base H. Conversion Factors I. Economic Viability: A Procedure VIII. Large Projects, Linkages, and National Affordability IX. Least-Cost and Cost-Effective Analysis X. Investment Criteria: Economic Viability XI. Discount Rate XII. Uncertainty: Sensitivity and Risk Analysis XIII. Sustainability of Project Effects XIV. Distribution of Project Effects XV. Projects and Policies XVI. Appendices XVII. Others

Guidelines for the Economic Analysis of Projects : VII. Valuation of Economic Costs and Benefits

---

C. Economic Prices of Traded Goods and Services

65. Project effects estimated in terms of traded goods and services can be measured directly through their border price equivalent valuethe world price for the traded product for the country concerned, adjusted to the project location. The steps involved are summarized at the end of Appendix 10. The world price for the country is the border price, the price in foreign exchange paid for imports inclusive of insurance and freight at the port or, for landlocked countries, at the railhead or trucking point; or the world price received for exports at the port, railhead, or trucking point. Border prices for exported outputs can be adjusted to the project location by subtracting the cost of transport, distribution, handling, and processing for export measured at economic prices. Border prices for imported inputs have to be adjusted by adding such costs to the project site. Outputs that substitute for imports should be adjusted by the difference in transport, distribution, and handling costs between the existing point of sale and the project site. Project inputs that reduce exports should be adjusted by the difference in costs between the point of production and the project location. In each case, the traded good or service is estimated through its border price equivalent value (BPEV), adjusting for the economic cost of local costs (see Table 3 and Appendix 10).

66. World prices are not stable. They fluctuate from year to year. The world price from which border price equivalent values are derived should be expressed as an annual average price over successive fluctuations. Also, it should be adjusted for any quality differences between the world price reference product and project outputs and inputs. World prices are also subject to long-term relative price changes. Where it is forecast that the real price of a traded product, the forecast nominal price deflated by an index of world prices, such as the unit manufacturing value added index, will increase or decline over time, then the forecast real price for future years should be used in the project economic statement. This applies to major outputs and major inputs that are traded internationally. Bank analysis uses the forecast real prices of commodities published quarterly by the World Bank.

67. In most cases, world prices will not be affected by a single new project. However, where a country produces a high proportion of world output, for example production of timber, the effects of extra output on the world price itself should be taken into account. The marginal export revenue allowing for the effects on price of greater supply should be estimated. Similarly, where a project creates additional demand for an input that is large relative to world supplies, such as for lucretia extract, the input should be valued at its marginal border price equivalent value allowing for the effect on world prices of the additional demand. In these cases, elasticity estimates are required at present world price levels to estimate the marginal export or import effect (see Appendix 10).

68. Differences between domestic market prices and border prices of traded goods occur because of net tax and trade controls, the project location, and the monopolization of domestic markets. Valuing traded goods at their border price equivalent values and adjusting for the effects of net taxes and controls, the economic costs of local costs, and monopoly rents, removes the differences between domestic and world market prices. Initially, border price equivalent values will be estimated by converting all foreign exchange values into domestic currency at the official exchange rate. However, the exchange rate, through which traded goods and nontraded goods valued at domestic market prices are made comparable, may itself be a cause of difference between domestic and border price equivalent values. The use of a shadow exchange rate or its converse, the standard conversion factor, is discussed later.

Back B. Role of World Prices	Next D. Economic Prices of Nontraded Goods and Services