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Evaluating Projects in a Dynamic Economy: Some New Envelope Results

Author

Listed:
  • Li Chuan-Zhong

    (Uppsala University,Uppsala, Sweden)

  • Löfgren Karl-Gustaf

    (Umeå University,Umeå, Sweden)

Abstract

This paper deals with the modern theory of social cost-benefit analysis in a dynamic economy. The theory emphasizes the role of a comprehensive, forward looking, dynamic welfare index within the period of the project rather than that of a project’s long-term consequences. However, what constitutes such a welfare index remains controversial in the recent literature. In this paper, we attempt to shed light on the issue by deriving three equivalent cost-benefit rules for evaluating a small project. In particular, we show that the direct change in a net national product (NNP) qualifies as a convenient welfare index without involving any other induced side effects. The project evaluation criterion thus becomes the present discounted value of the direct changes in NNP over the project period. We also illustrate the application of this theory in a few stylized examples.

Suggested Citation

  • Li Chuan-Zhong & Löfgren Karl-Gustaf, 2008. "Evaluating Projects in a Dynamic Economy: Some New Envelope Results," German Economic Review, De Gruyter, vol. 9(1), pages 1-16, February.
    • Handle: RePEc:bpj:germec:v:9:y:2008:i:1:p:1-16
    DOI: 10.1111/j.1468-0475.2008.00420.x
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