Can You Explain The Shadow Price For Capital?


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Muhammad Abdullah786 Profile
To determine the shadow price we will have to analyses those factors which influence the supply of and demand for capital. But in the case of UDCs it is difficult to find them. Moreover, in such countries the supply of capital is hardly influenced by changes in the rate of interest. Again, the rate of interest differs because of difference in place and sectors. Therefore, the shadow price is determined by the rate of interest which the individuals have to pay. But doing so we will have to keep in view those risks which are attached with different loans. Accordingly, loans will have to be discounted.

The material, labor, foreign exchange and other inputs be priced at accounting price. To find the return of capital, all such above costs be subtracted from the total output. In this way the planner can find the shadow price of capital. But there are following obstacles in the way of calculating shadow price of capital by this method.

What the individual investors pay as an interest is not a suitable criterion to allot the shadow price to capital. In long run it may rise.For the sake of shadow prices of capital the marginal productivity of capital will have to be calculated. But it is difficult task to find MPK, where some projects are more capital intensive and some are less capital intensive. Moreover, there is wastage of capital in the course of substitution of labor and capital, in the mobility of raw material and in the packing of goods etc.

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