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Numerical calculation of shadow prices for investment project analysis: The case of Chile

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1 Author(s)
Taylor, L. ; Harvard University, Cambridge, Massachusetts

This paper describes experimental calculations of shadow prices for evaluation of investment projects in the Chilean economy. These are based on a growth model emphasizing the dependence of Chile on foreign trade, especially imports of capital goods. For this reason two state variables are used-one standing for plant-type capital produced by a non-traded sector and the other representing equipment-type capital which must be imported. These imports are paid for by exogenous traditional exports, and exports from a traded goods sector. The model thus determines allocation of imported and domestic factors between the two sectors, and the corresponding pricing policy. Numerical results show (i) a rate of discount consistent with the results of other rate-of-return studies in Chile; (ii) an almost flat transformation surface between the traded and nontraded sectors, with a correspondingly inflexible relative price ratio; (iii) inverse proportionality between tariffs and the exchange rate, which follows essentially from the flat transformation surface. This last result is inconsistent with partial equilibrium estimates of the shadow exchange rate, and some doubt is raised as to what is the "true" value of this shadow price.

Published in:

Decision and Control, 1971 IEEE Conference on

Date of Conference:

15-17 Dec. 1971