One Developing Country Currently Imports All Its Wheat But I

One Developing Country Currently Imports All Its Wheat But Is

A certain developing country currently imports all its wheat but is considering funding an irrigation project that would allow domestic farmers to grow and sell wheat. The domestically grown wheat would be sold in competitive markets at an estimated price of 15 dubyas per bushel. The wheat the nation currently imports has a CIF price of US $3 per bushel. The official exchange rate is 4 dubyas per dollar.

The nation’s tariff on imported wheat is 2 dubyas per bushel. Transportation and distribution charges from the port to a typical market are 2 dubyas and 1 dubya per bushel, respectively. The APR has been estimated to be 0.6 for transportation and 0.8 for distribution. a. Calculate the market price of imported wheat. b. Calculate the shadow price of imported wheat. c. Should the irrigation project proceed? Assume that a typical unskilled rural worker in a developing country would be paid 2 dubyas a week if he migrates to the city and finds a job. However, the unemployment rate for unskilled workers is 40 percent in the city. a. What does the Harris-Todaro model predict the worker’s rural wage is? b. Assume now that the government is considering funding a project in the city that would use substantial numbers of unskilled workers. Using your answer to part a, suggest a reasonable upper-bound and lower-bound estimate of the market wage rate for unskilled workers that the government might use in conducting a CBA of the proposed project.

Paper For Above instruction

The analysis of whether a developing country should fund a domestic wheat production project involves assessing market prices, shadow prices, labor wages, and economic models like Harris-Todaro. This comprehensive review will evaluate the relevant costs and benefits, integrating international trade concepts and labor economics to inform the decision-making process.

Calculation of the Market Price of Imported Wheat

To determine the market price of imported wheat, we must consider the CIF price, exchange rate, tariffs, and transportation and distribution costs. The CIF price is US $3 per bushel, and with an exchange rate of 4 dubyas per dollar, the CIF price in domestic currency is 12 dubyas per bushel (3 dollars x 4 dubyas/dollar). Adding transportation (2 dubyas) and distribution charges (1 dubya), the total additional costs amount to 3 dubyas per bushel. The tariff on imported wheat is 2 dubyas, which increases the landed cost. Hence, the total cost including tariff becomes 12 + 2 + 2 + 1 = 17 dubyas.

Therefore, the market price of imported wheat, which accounts for all the costs including tariffs and transportation, is approximately 17 dubyas per bushel.

Shadow Price of Imported Wheat

The shadow price reflects the economic true cost of imported wheat, considering distortions like tariffs and transportation costs. To compute the shadow price, we subtract the tariff (which can be considered as an economic transfer rather than a true resource cost) from the market price, and adjust costs by their respective approximate economic weights. Given the tariff of 2 dubyas per bushel, the shadow price may be estimated as the CIF price plus transportation and distribution costs (since tariffs are transfer payments rather than resource costs), resulting in a shadow price close to 15 dubyas per bushel, corresponding to the domestic market price for competitive wheat.

Decision on the Irrigation Project

Considering the domestic wheat market price of 15 dubyas per bushel, which exceeds the calculated shadow price, the project appears economically feasible. The project would enable farmers to produce wheat at a cost competitive with imported wheat prices, thus potentially reducing import dependence and fostering rural employment. Moreover, the cost of production should be evaluated against the domestic selling price, considering input costs, labor, and capital. If the marginal cost of domestic production is less than or equal to 15 dubyas, then funding the irrigation project would be justified.

Labor Market Dynamics and the Harris-Todaro Model

The Harris-Todaro model predicts that in a developing country with unemployment, rural wages are determined by equilibrium in the rural labor market, which tends to be lower than urban wages because of migration incentives and urban unemployment. Given that unskilled workers earn 2 dubyas weekly in the city, but face a 40% unemployment rate, their expected urban wage is reduced. The model suggests that the rural wage can be approximated by the expected urban wage, considering probabilities of employment.

Predicted Rural Wage

The expected urban wage for an unskilled worker is calculated as:

Expected urban wage = (Probability of employment x urban wage) + (Probability of unemployment x urban wage, which is zero since unemployed workers earn nothing). Since only 60% are employed, the expected wage is 0.6 x 2 dubyas = 1.2 dubyas per week. This inference indicates that the rural wage would be approximately 1.2 dubyas per week, reflecting the equilibrium wage consistent with migration patterns dictated by the Harris-Todaro model.

Upper and Lower Bound Estimates for Wages in Cost-Benefit Analysis

For conducting a comprehensive cost-benefit analysis (CBA) of urban projects utilizing unskilled labor, estimations of wages are crucial. An upper-bound estimate would assume full employment in the urban sector at the prevailing wage, i.e., 2 dubyas per week. A lower-bound estimate would consider the predicted rural wage derived above, approximately 1.2 dubyas per week, which accounts for employment probabilities and unemployment rates.

Hence, reasonable wage estimates would range from about 1.2 to 2 dubyas per week. The upper-bound reflects the scenario where the project creates full employment or that wage is sustained at current urban levels, while the lower-bound captures the expected wages based on migration equilibrium under unemployment constraints.

Conclusion

Based on these calculations, investing in domestic wheat production through irrigation seems promising if the domestic marginal costs are below the competitive market price of 15 dubyas per bushel. Accounting for labor market dynamics, the expected rural wages and the labor market constraints suggest the government should consider wages ranging between 1.2 and 2 dubyas per week for project evaluation. Such an analysis demonstrates the importance of integrating international trade costs, shadow pricing, and labor economics to guide policy decisions in developing countries.

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