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p. 15 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

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B. Role of World Prices

61. One approach to estimating the value of outputs and inputs from the national point of view uses world market prices. The extra outputs and demand for inputs created by a project will have a direct or indirect effect on international trade. World market prices are also subject to national and international policy effects and, in some cases, to monopolized market structures. However, trade represents an alternative to domestic production for most goods and services. Hence, world prices can be used to measure the value of project inputs and outputs from the national perspective.

62. The valuation of outputs and inputs through world prices requires that the trade effect of each project item be identified. Incremental outputs that are exported can be valued at the export demand price and outputs that substitute for imports can be valued at the import supply price. Where a projects output involves both substituting for imports and an expansion of exports, it should be valued at the weighted average of import supply and export demand price. Incremental inputs that are imported can be valued at the import supply price, while inputs that reduce the level of exports can be valued at the export demand price. Where extra inputs involve both a reduction in exports and an increase in imports, they should be valued at the weighted average of the export demand and import supply price. World prices will differ from the domestic prices used in the financial analysis of the project because of

• the effects of trade controls and net taxes on traded goods;
• the monopoly pricing of some traded goods; and
• subsidy levels, especially for utility prices.

Adjusting prices to world prices in effect excludes all tax and subsidy elements from project input costs and ensures that outputs are valued at their worth to the national economy. Any excess operating surplus, over and above production or supply costs including a capital charge, resulting from monopoly supplies of nontradable outputs or inputs, should also be excluded.

63. Applying world prices to measure the marginal value of project outputs and inputs can be directly applied to traded project items. They can also be applied indirectly to the incremental production costs of project inputs that are nontraded. However, they cannot be applied directly or indirectly to outputs that have no trade effect (see Table 2).

64. All project items should be valued using the same reference point. There are different levels of prices: producer prices, wholesale prices, and retail prices. The economic prices of all outputs and inputs should be valued at the project level. Generally, this means at the point of production for the project or subproject. World prices and other forms of valuation should be adjusted to the level of the project for purposes of comparing the economic value of project costs and benefits.

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