Project Appraisal Procedures and the Evaluation of Foreign Exchange: A Comment.

In 1986, Dinwiddy and Teal analyzed the shadow exchange rate (SER) in a tariff-distorted, small economy containing two traded and one non-traded good. Contrary to their claim, I maintain a SER is inherent to their model even if the balance of payments constraint is "binding." It equals the value of the marginal consumption basket at market prices divided by its value at world or foreign exchange equivalent (FEE) prices. Shadow prices defined in welfare terms equal the products of the SER and (1) the world (or FEE) prices of goods, or (2) marginal products of factors at world prices. Copyright 1990 by The London School of Economics and Political Science.