USSR: Measures of Economic Growth and Development, 1950-80

Approved for Release: 2019/07/19 C05210421
Finally, industries with a high ratio of material inputs
to gross output are more susceptible to biases imposed
by double-counting. This means we would expect a
greater danger of significant bias in the measurement
of machinery, chemicals, and construction materials
output and a smaller bias in the remaining branches.
The preferred measure for most purposes is the sum of
value added by industrial sector, where value added
equals gross value of output of a sector less purchases
of goods and services from other sectors of the
economy. Value added measures the net contribution
of a particular industry to national product. It is the
sum of profits, wages, depreciation, other payments to
the factors of production, and indirect business taxes
less subsidies. To construct a value-added index,
however, requires accurate data on production (quan-
tities and prices) and purchases of inputs from other
sectors (quantities and prices).
Two approaches have been used to derive indexes of
value added in constant prices. One approach—re-
ferred to in the economic literature as double-defla-
tion——measures both outputs and intermediate inputs
in constant prices, where value added is the difference
between the two. This can be accomplished in one of
two ways; either constant price measures for output
and intermediate inputs can be used or current price
measures for each individual component can be de-
flated with price indexes. The information require-
ments of this approach are extremely rigorous because
both outputs and purchases from other sectors of the
economy must be tracked over time. While reported
Soviet production data are deficient in quantity and
quality, statistics on material inputs are even scarcer.
For this reason, double-deflation is not practical in
compiling SPIOER.
An alternative approach (used in the Federal Reserve
Board’s index of US industrial production) is a hybrid
procedure that combines gross output indexes with
value-added weights for a base year. This approach,
known as a single indicator method, is as good as
double-deflation only if gross output and purchases
from other sectors move over time at the same rate.
Since this is a rough approximation at best, the hybrid
F RB-type indexes only approximate a true value-
added series. They do remove most of the double-
counting inherent in pure GVO measures of industrial
production (completely in the base year, less than
completely in other years).
While double-deflation is closer than the single indi-
cator approach in theory to the notion of value added,
both the output and input indexes used by double-
deflation must be accurate. T. P. Hill has argued
convincingly that under fairly weak assumptions er-
rors in the output and input indexes will compound
measured bias rather than offset each other and that
using a single indicator will produce a more accurate
result. Moreover, Hill’s study of growth in several
OECD countries suggests that on average the growth
rate is not much different whether double-deflation or
a single indicator is used. Although the method used
undoubtedly affects the measured growth of some
components of industrial activity, these differences
tend to cancel out.“
Depending on whether gross output or value added is
used, one may receive an entirely different impression
of both industrial structure and growth. In figure 3
the share of industrial production by branch of indus-
try in 1972 is displayed both for gross output and
value-added weights. The_gross-output scheme tends
to give a higher weight to sectors that either produce
mainly for final consumption or are highly material
intensive and a lesser weight to sectors that either
produce mainly for further industrial processing or
are highly labor and capital intensive. Thus, to the
extent that industries with the most double-counting
are growing relatively slowly, the gross- output index
is biased downward and vice versa. In the Soviet case,
both light industry and processed foods have lagged
behind other branches whereas machinery has grown
the fastest. With gross-output weights, light industry
and processed food gain in importance and machinery
loses. Other things being equal, therefore, Soviet gross
output of industry tends to increase more slowly than
value added.
“ For an extensive discussion of the properties and relative merits of
the two methods, see T. P. Hill, The Measurement qfReaI Product:
A Theoretical and Empirical Analysis of the Growth Rates for
Different Industries and Countries, (Organization for Economic
Co-operation and Development, 1971), pp. ll-37, 111-112, 118-
1 19.
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Approved for Release: 2019/07/19 C05210421