Producing foreign exchange is the domestic resource

producing foreign exchange is the domestic resource cost method proposed
by Michael Bruno. Though this approach is oriented to estimate what is the
cost of producing foreign exchange by a single project, its principles can be
applied to estimate the cost of producing foreign exchange at the macro level.
Programming Approach
Another approach for determining the value of foreign
exchange is the programming approach. According to this approach, the
shadow price of foreign exchange is obtained by solving the dual problem of
an economy-wide optimising mathematical programming model. In the
primal model, one of the constraints represents limited foreign exchange
availability. (More than one constraint relating to foreign exchange may be
introduced if it is necessary to distinguish various foreign currencies.) Hence
the shadow price represents the contribution that unit of foreign exchange at
the margin would make to the objective function.
Conceptually sound, the usefulness of this approach in practice depends on
whether the model reflects economic realities and whether the required data
are available. Since these conditions are not readily satisfied, caution should
be exercised in employing this approach.

Bridge Project
To illustrate the calculation of net economic benefit, two
examples are given. The first example is that of a bridge project. The second
example is that of a river valley project.
Presently, a ferry service, operated privately, is being used to cross a river.
The ferry operator charges Rs 3 per person. It costs him Rs 2 per person.
50,000 persons use the ferry service. (This means that the number of persons
crossing the river by ferry service throughout the year is 50,000.)
The government is considering construction of a bridge over the river. It is
estimated that after the bridge is constructed 2,50,000 persons will cross the
river on the bridge. The bridge is expected to cost Rs 3 million initially and
its annual maintenance cost would be Rs 10,000. It has an indefinitely long
life. Once the bridge is constructed the ferry operator is expected to close
down the ferry service and sell the ferry boats for Rs 100,000.
Required: Define the social costs and benefits of constructing the bridge,
assuming that the monetary figures given in the problem
represent economic values.
Solution: The social costs and benefits of bridge construction may be
defined as follows:
Costs
These consist of the following:
1. Construction cost: Rs 3,000,000 (This is a one-shot cost).
2. Maintenance cost: Rs 10,000 (This is an annual cost).
Benefits
These consist of the following:
1. Value of ferries released: Rs 100,000 (This is one-shot benefit).
2. Savings in the cost of ferry operation: Rs 100,000 (This is an annual
benefit).
3. Increase in consumer satisfaction: This is equal to willingness to pay
of 200,000 additional persons who are expected to use the bridge.