Tradable and Nontradable Goods

Typically, a project’s inputs include material inputs, public utilities, labor,

land, and services. Some of these goods and services are tradable,

some are nontradable, and others are potentially tradable. These distinctions

are important, because the valuation of each type of good is different.

Traded goods include those that are either imported or exported by

the country. Tradable goods include all traded goods and goods that the

country could import or export under conditions of free trade, but does

not because of trade barriers such as import duties. Material inputs, however,

are normally tradable goods.

Nontradable goods are those that by their nature either cannot be traded

or are uneconomical to trade internationally. Real estate, hotel accommodations,

haircuts, and other services are typically nontradable. Nontradable

goods also include goods for which the costs of production and transportation

are so high as to preclude trade, even under conditions of free trade.

In principle, a good falls into this category if its CIF cost or landed price is

greater than the local cost. This condition precludes importation, and at

the same time, its local cost being greater than the FOB price, precludes

exportation. In some cases electric energy and transportation might be

nontradable. Land, however, is always a nontradable good.

To determine whether a good is tradable or nontradable, the first

step is to ascertain whether the good trades internationally. If no international

trade exists, then it is safe to assume that the good is

nontradable. If international trade takes place, but not in the country

where the project is to take place, the second step is to estimate the

relevant CIF and FOB prices, then compare them to the domestic price.

If the CIF price—net of import duties and subsidies—of the good is

higher than its domestic price, then the good is clearly not importable.

If its FOB price—net of export duties and subsidies—is lower than the

domestic price, then the good is clearly not exportable. Of course, the

exchange rate is crucial in this calculation. A nontradable may become

an export if the real exchange rate falls. If, by contrast, imports do not

come into the country, because, for example, import duties render the

import price higher than the domestic price, international trade does

not take place because of distortions. The good, however, is potentially

a traded good. Likewise, if duties make exports uncompetitive, the good

is potentially a traded good. All such potentially traded, but nontraded

goods, should be treated as nontradable goods.

Valuation of Tradable Goods

For various reasons, domestic market prices typically do not reflect the opportunity

costs to the country. In many countries, import duties, for example,

increase the price of domestic goods above the level that would prevail

under conditions of free trade. If the domestic price of inputs is far

higher than under conditions of free trade, a project that uses the protected

input may have a low, financial, expected NPV. Likewise, if a project produces

a good that enjoys protection, the project’s financial NPV may be

higher than under conditions of free trade. To approximate the opportunity

costs to the country, the valuation of tradable inputs and outputs in economic

analysis relies on border, rather than on domestic, market prices. The

technical annex provides a theoretical justification for using border prices

as the prices that reflect the opportunity costs to the country.

Border prices are either CIF or FOB prices suitably adjusted for internal

transport and other costs, but net of taxes and subsidies. If the country is a

net exporter of the good in question, the appropriate border price is the

FOB price of exports—also known as the export parity price. If the country

is a net importer, the appropriate border price is the CIF price of imports

plus internal transport costs—or the import parity price.