Domestic Price System of Economic Analysis

The previous chapter discussed how all project outputs and inputs can be valued at world prices to assess their trade opportunity costs. Economic analyses can be carried out using different units of account or numeraire. As with distance, which can be measured in miles or kilometres, the choice of different units makes the same calculation appear different, but provided equal accuracy is used, the results will be directly equivalent. This chapter considers how domestic prices can be used to measure trade opportunity costs, in what we will term a domestic price system. It commences by discussing the conditions under which world and domestic price systems give equivalent results. It then considers the shadow exchange rate, a key parameter in the domestic price system. The detail of how conversion factors for traded and non-traded goods and labour are derived in a domestic price system is discussed, before land and the discount rate are considered briefly. The appendix reworks the PSF case study in a domestic price system.