# Producing foreign exchange is the domestic resource

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producing foreign exchange is the domestic resource cost method proposedby Michael Bruno. Though this approach is oriented to estimate what is thecost of producing foreign exchange by a single project, its principles can beapplied to estimate the cost of producing foreign exchange at the macro level.Programming ApproachAnother approach for determining the value of foreignexchange is the programming approach. According to this approach, theshadow price of foreign exchange is obtained by solving the dual problem ofan economy-wide optimising mathematical programming model. In theprimal model, one of the constraints represents limited foreign exchangeavailability. (More than one constraint relating to foreign exchange may beintroduced if it is necessary to distinguish various foreign currencies.) Hencethe shadow price represents the contribution that unit of foreign exchange atthe margin would make to the objective function.Conceptually sound, the usefulness of this approach in practice depends onwhether the model reflects economic realities and whether the required dataare available. Since these conditions are not readily satisfied, caution shouldbe exercised in employing this approach.
Bridge ProjectTo illustrate the calculation of net economic benefit, twoexamples are given. The first example is that of a bridge project. The secondexample 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 personscrossing the river by ferry service throughout the year is 50,000.)The government is considering construction of a bridge over the river. It isestimated that after the bridge is constructed 2,50,000 persons will cross theriver on the bridge. The bridge is expected to cost Rs 3 million initially andits annual maintenance cost would be Rs 10,000. It has an indefinitely longlife. Once the bridge is constructed the ferry operator is expected to closedown 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 problemrepresent economic values.Solution:The social costs and benefits of bridge construction may bedefined as follows:CostsThese 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).BenefitsThese 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 annualbenefit).3.Increase in consumer satisfaction: This is equal to willingness to payof 200,000 additional persons who are expected to use the bridge.

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