| Monday, November 01, 2004 - 03:10 am |
No, you misunderstand. The point of the formula is to discover the price of a product being bought from a foreign coorperation.
The point of the MAX is to prevent the adjusted selling-abroad price, because of a high shipping index and a short distance, from falling below the default selling-at-home price. Shouldn't cost *more* to buy it locally than to buy it once it's been shipped 200 miles.
Similarly, the n%*D is to ensure that there's always a *little* cost increase as things are shipped further, even if the S is high enough to offset the additional (d$) cost. (Though this could be initially set as n%=0 to see how it works basing it on s%*S and d%*D alone).
So this formula is all about computing the price *from* a single country, not about adjusting the price between countries. All the between-country differences remain.
So distantly-produced goods from country A can still be cheaper than locally produced goods in country B, as you point out -- it's just that it'll still cost more to buy A's goods in country B than it costs to buy A's goods in country A... or, for that matter, buying them in countries closer to A than B.
Actually, to be even more realistic, one could factor in the shipping index of the *receiving* country as well. Either by averaging the two, or weighting them.
Actually, most accurate might be to factor in:
* the transportation index of the producer (how efficiently the goods are transported from factories to ports)
* the shipping index of *either* the producer or the consumer (for whoever is doing the actual shipping)
* the transportation index of the consumer (how efficiently the goods are transported from ports to factories).
These three together give you T(g,A,B), i.e. the transportation cost for shipping product g from country A to country B, where T is calculated from the transportation & shipping indices of countries A and B.
So you then get Pe (effective price for B to buy) calculated from Pp (production price in A), T, and D (distance) as:
Pe = Max (Pp , Pp * (d% * D - s% * T)) + n% * D
The Pp offset from D and S might more realistically be computed by something more realistic than a simple subtraction, perhaps by some function Fn based on D/T, so the higher the transportation (or shipping) value the lower the per-distance cost, with Fn(D/T) still giving you *something* greater than zero.
Pe = Pp + Pp*Fn(D/T).