UNIDO and Merrlees Approach by 2018-IM-03

TITLE: UNIDO AND MERRLEES APPROACH
Project Management in Engineering
Submitted To: Dr. Abdul Aziz Niazi Khan
Submitted By: Shahbaz Ahmad

Registration No: 2018-IM-03
Email: Sa621619@gmail.com
MAIN CAMPUS UET, LAHORE

DEPARTMENT IME
DUE DATE: 09/06/2021
Broadly, there are two methods of measuring economic costs & benefits of a project:
 UNIDO approach
 Little-Mirrlees approach.
1- UNIDO Approach:
In this method economic benefits & costs may be measured at domestic prices using
consumption as the numiraire, with adjustment made for divergence between market prices and
economic values, and making domestic and foreign resources comparable using shadow
exchange rate (SER).
In this method, if commodities are traded, first all these traded goods will be adjusted for any
distortions in the domestic markets.
After this adjustment is made the adjusted domestic price will be multiplied by SER to make
domestic resources be comparable with foreign resources.
The easiest way for adjusting domestic market distortions is to use border prices, c.i.f., for
imports and f.o.b. for exports and then multiply this border price expressed in foreign currency
by SER to arrive at economic border prices.
But, if the commodities are non-traded, i.e. if f.o.b. prices are less than domestic prices &
domestic prices less than c.i.f. prices and if the market prices are good estimates of opportunity
cost or willingness to pay, we directly take the market price as economic value of the item.
But if the prices of non-traded items (goods and services or factors of production) are distorted,
we will adjust the market price to eliminate distortions and then use these estimates of
opportunity cost as the shadow price to be entered in the economic analysis.
This method can be summarized by the following example. Suppose we have a project producing
export item that uses both foreign & domestic inputs. The net benefit (ignoring discounting)
would be estimated as:
𝐍𝐞𝐭 𝐁𝐞𝐧𝐞𝐟𝐢𝐭=𝐒𝐄𝐑(𝐗−𝐌)−𝐃
Where X - border price of exports in foreign currency M - border price of imported goods in
foreign currency D - adjusted (economic) values of domestic goods in domestic currency.
SER - is the shadow exchange rate (assuming the official exchange rate does not accurately
reflect the true value of foreign currencies to the economy). Where;
𝐃𝐏 𝐞 𝐭𝐢 𝐢 𝐞
𝐒𝐄𝐑=
𝐏( 𝐢 𝐞)
2- Little-Mirrlees Approach:
The other method of adjusting market prices into economic prices is the Little-Mirrlees approach
(see Little & Mirrlees, 1969, 1974).
In this approach benefits and costs may be measured at world price to reflect the true opportunity
cost of outputs and inputs using public saving measured in foreign exchange as the numiraire
(that is, converting everything into its foreign exchange equivalent).
The fact that foreign exchange is taken as a numiraire does not mean that project accounts are
necessarily expressed in foreign currency.
The above adjustment applies for traded goods (imported or exported goods). But if the goods or
inputs in question are non-traded goods, the analyst needs to use conversion factor to translate
domestic prices into their border price equivalent.
A conversation factor (CF) is the ratio of the economic (shadow) price to the market price, that
is:
𝐄 𝐧 𝐢 𝐏 𝐢 𝐞
𝐂𝐅=
𝐌 𝐞𝐭 𝐏 𝐢 𝐞
Taking the following example can summarize Little-Mirrlees approach of adjusting domestic
prices into economic prices. A project that produces export goods can be assessed as follows.
𝐍𝐞𝐭 𝐏 𝐞 𝐞𝐧𝐭 𝐕 𝐮𝐞 (𝐍𝐏𝐕)= 𝐎𝐄𝐑 (𝐗−𝐌)−𝐒𝐂𝐅.𝐃

Where;
 OER- official exchange rate

 X-exported goods in foreign currency
 M-imported goods in foreign currency
 SCF-standard conversation factor
 D-price of non-traded goods in domestic currency
To summarize, as long as SCF is the ratio of OER to SER, the two approaches - UNIDO and
Little-Mirrlees - differ only to the extent that SER is different from the actual exchange rate.
2.1. Export Parity Price:
Convert foreign currency to domestic currency at official exchange rate (OER) if you are using
the L-M approach or shadow exchange rate (SER) if you are using UNIDO approach.
 C.i.f. at point of import (say, Canada port)

 Deduct- unloading at point of import
 Deduct- freight to point of import (in this case air freight)
 Deduct – insurance
 Equals – f.o.b. at point of export (A.A)
2.2. Import Parity Price:
Convert foreign currency to domestic one (multiply by OER) if you use L-M approach and SER
if you use UNIDO approach:
 F.o.b. price at point of export

 Add-freight charges to point of import
 Add-insurance charges
 Add- unloading from ship to pier at port
 C.i.f. Price at the harbor of importing countries

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TITLE: UNIDO AND MERRLEES APPROACH

Project Management in Engineering

Submitted To: Dr. Abdul Aziz Niazi Khan

Submitted By: Shahbaz Ahmad

MAIN CAMPUS UET, LAHORE

𝐍𝐞𝐭 𝐏 𝐞 𝐞𝐧𝐭 𝐕 𝐮𝐞 (𝐍𝐏𝐕)= 𝐎𝐄𝐑 (𝐗−𝐌)−𝐒𝐂𝐅.𝐃

 OER- official exchange rate

2.1. Export Parity Price:

 C.i.f. at point of import (say, Canada port)

2.2. Import Parity Price:

 F.o.b. price at point of export

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