Project Evaluation During Inflation, Revisited: A Solution to Turvey's Relative Price Change Problem
Recent literature on benefit-cost analysis has dealt with the general problem of project evaluation during inflation. This report extends an earlier analysis in order to illustrate the correct manner for dealing with cases in which relative prices change during the life of a project. A problem posed by Ralph Turvey illustrates the nature of the difficulties which can arise if one fails to account properly for relative price changes. These difficulties can be overcome if one gives explicit attention to the choice of the numeraire to be used in conducting the benefit-cost analysis. Also, unlike cases in which all prices change in the same proportion, correct analyses in the presence of relative price changes require a forecast of general price inflation.