Valuation: commodities, foreign exchange, labour (I) R. Jongeneel Curry & Weiss chapters 4, 5

Lecture Plan  Steps in the analysis  Example: two points of view  The issue of transfer  Economic analysis and opportunity costs  Shadow price-principle (CR’s)  Numeraire choice

Steps in the analysis  Who is the client?  What are the goals of the analysis?  What is the objective?  What are the alternatives?  What are the consequences of each of the alternatives?  How are the consequences to be valued?  Efficiency and beyond ? (distribution)

Example: two points of view  Agricultural price support policy & nature conservation S support D P dom P wm a c b d

Example: two points of view Project owner Fundamental points of view national economy Possible points of view (NB):  farmer (+a+b+c)  consumer (-a-b)  minister of agriculture (a+b+c-a-b)?  minister of finance (-b-c-d)  national economy ….?

Example: two points of view National economy  W=  CS+  PS+  GR+  EE = -(a+b)+(a+b+c)-(b+c+d) = -(b+d)

Example: two points of view Question: nature conservation project: what is appropriate valuation? Benefit B nat Assume: more nature, less agriculture  leftward shift supply S C nat = output loss D P dom P wm S’ Foregone output Which price to use…?

Economic valuation: issue of transfers Rule: transfers should be omitted from economic calculations Question: what are transfers? Examples:  payment of sales tax  receipt of cash subsidy  unemployment benefit  and …. social security (welfare state) …??

Economic valuation: issue of transfers Demarcation criterion: A payment or receipt is a transfer if it is a pure re-distributive financial stream and no charge for the use of resources or related to particular services Rule: If ‘transfer’ is related to economic activity it may not be omitted from BC-analysis

Economic valuation: issue of transfers  Pure income redistributive taxes  rent (land, no maintenance)NO  special taxes land tax (landscape, infrastructure) water tax (covers cost of water system) direct payment (agr. Cross compliance)YES  receipt, repayment of loan, paid interest  indirect costs and benefits

Economic analysis and opportunity costs  Economic analysis: value inputs and outputs w.r.t. their contribution to the national economy  Key-word: opportunity costs can be market prices more generally shadow prices  Example (I): labour surplus economies: migration out of agr. into industry (opp. costs vs. wage)

Economic analysis and opportunity costs Example (II): exchange rate regime in 1950s and 1960s. Bretton Woods-system with fixed exchange rates relative to US dollar. Influences import-intensity and export competitiveness of production

Economic analysis and opportunity costs  Information: put world prices in operational terms import cif price (imports) export fob price (exports) project location (border parity pricing) indirect method for non-tradables Assumption: fixed prices

Economic analysis and opportunity costs  Conversion factor (CF)  Calculate NPV taking into account CF; and appropriate discount rate

Numeraire choice  Implicit objective (opp cost principle): maximize net resources available to the economy  Numeraire: shadow prices can be expressed in either a domestic numeraire or directly in foreign exchange units

Lessons  valuation: “agent” - dependent  valuation: context - dependent  transfers: omit or not-omit  shadow price: opp. cost principle  evaluation: financial & economic