The "Stationarity" of Shadow Prices of Factors in Project Evaluation, with and without Distortions

Bhagwati, Jagdish N.; Wan, Henry

The article investigates the Ronald Findlay-Stanislaw Wellisz and T. N. Srinivasan-Bhagwati (F-W-S-B) two-by-two small-country model of traditional international trade theory. Section I recapitulates the basic F-W-S-B analysis, retaining the two-by-two model but distinguishing between the with-distortion and the no-distortion cases. Section II examines the many-good-and-factors cases: goods equal factors, no distortion; good equal factors, with distortion; goods outnumber factors, no distortion; goods outnumber factors, with distortion; factors outnumber goods, no distortion and factors outnumber goods, with distortion. Section III offers concluding observations, indicating the applicability of the analysis to other problems in trade theory and the relationship of the results to mathematical programming. The F-W-S-B model is characterized by three key features: constant-returns-to-scale production functions; two primary factors producing two graded goods; and fixed foreign prices for the two traded goods. The uniqueness and stationarity of the marginal variational shadow prices in the two-by-two F-W-S-B model, with and without the specified distortions, do not necessarily carry over to the cases with unequal numbers of goods and factors that need to be analyzed as soon as the author consider many goods and factors. The analysis leads to many observations. First, the relative numbering of factors and goods is of signifiance. Second, the analysis has clear applicability to the transfer problem, conceived not as a transfer of purchasing power, but rather as a transfer of factors of production as may be the case when reparations payments have to be made in barter. Third, the analysis has applicability therefore to the theory of international factor mobility.



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American Economic Review

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September 27, 2012