IDEAS home Printed from https://ideas.repec.org/p/cpr/ceprdp/42.html
   My bibliography  Save this paper

Factor Shadow Prices in Distorted Open Economies

Author

Listed:
  • Smith, Alasdair

Abstract

In a competitive constant-returns small open economy world prices are the appropriate shadow prices for traded goods in public sector cost-benefit analysis. If there are at least as many factors of production as there are goods produced and traded, it is straightforward to derive 'foreign-exchange-equivalent' factor shadow prices. Bertrand (American Economic Review, 1979) has argued that the case of more goods being produced and traded than there are factors (referred to as 'diversification' below) is of greater empirical relevance, and that in this case it is impossible to define factor shadow prices. In this paper, I argue that this view is incorrect, in the sense that if the economic forces which bring about the diversification of production are consistently and explicitly modelled, just enough information is available to define the factor shadow prices. The cases considered are: (i) a small open economy in which the government's objective is to influence the distribution of income, in which case diversification could only result from an irrational use of the policy tools available to the government; (ii) a small open economy in which there are political constraints on production levels in some activities, in which case world prices are not the correct shadow prices for the constrained activities; and (iii) a closed economy (which can be thought of as a model in which world prices are endogenous) in which the shadow prices of goods are not world prices.

Suggested Citation

  • Smith, Alasdair, 1985. "Factor Shadow Prices in Distorted Open Economies," CEPR Discussion Papers 42, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:42
    as

    Download full text from publisher

    File URL: http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=42
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Shamaila Butt & Faisal FAISAL & Muhammad Ali Chohan & Adnan Ali & Suresh Ramakrishnan, 2024. "Do Shadow Economy and Institutions Lessen the Environmental Pollution? Evidence from Panel of ASEAN-9 Economies," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 15(1), pages 4800-4828, March.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:42. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://www.cepr.org .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.