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Department of Economics, Umeå University Umeå Economic Studies, Department of Economics, Umeå University

No 613:
Evaluating Projects in a Dynamic Economy: Some New Envelope Results

Chuan-Zhong Li () and Karl-Gustaf Löfgren ()

Abstract: This paper is concerned with the modern theory of social cost-bene.t analysis in

a dynamic economy. The theory emphasizes the role of a comprehensive, forward-

looking, dynamic welfare index within the period of the project rather than that

of a project.s long-term consequences. However, what constitutes such a welfare

index remains controversial in the recent literature. In this paper, we attempt to

shed light on the issue by deriving three equivalent cost-bene.t rules for evaluating a

small project. In particular, we show that the direct change in net national product

(NNP) quali.es as a convenient welfare index without involving any other induced

side e¤ects. The project evaluation criterion thus becomes the present discounted

value of the direct changes in NNP over the project period. We also illustrate the

application of this theory in a few stylized examples.

Keywords: dynamic cost-bene.t analysis; net national product; project evaluation; welfare index; (follow links to similar papers)

JEL-Codes: D61; (follow links to similar papers)

19 pages, September 15, 2003, Revised December 4, 2006

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