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

Approved for Release: 2019/07/19 C05210421
Differential Prices and New-Product Pricing
Not only do relative prices of Soviet goods and
services not correspond to relative costs of resources
used in their production, but the price of a product
often varies according to purchaser. The price dis-
crimination is sometimes accomplished by selective
application of taxes and subsidies, and sometimes by
charging different prices. The full extent of this price
discrimination is not known, but it is especially preva-
lent in the fuel sector. The indirect consequence is a
divergence in the relative prices of output from the
value of resources used.
Once a product is in serial production in the USSR,
its price rarely changes. This is due partly to bureau-
cratic inertia and partly to the convenience of price
stability for planning and administration. To increase
profits, many enterprises and ministries introduce new
products that are new in name only. Creating a new
product permits establishment of a new, higher price
for essentially the same good and results in relative
prices that do not reflect relative resource use and
hence do not measure accurately the production po-
tential of alternative economic activities. As with
differential prices, we have insufficient information to
account for this price distortion. Whenever possible,
therefore, we use physical output data to measure
changes in the level of output rather than deflated
value data. While avoiding the new-product price
problem, this method tends to understate quality
change.“
The Adjusted Factor-Cost Standard
Because of the deficiencies of Soviet prices, Bergson
concluded that established prices did not conform
sufficiently well with the requirements of the theory
of optimal resource allocation to permit their use in
measuring the change in Soviet production potential
over time or to study the resource allocation pattern
adopted by the Soviet Union. As an alternative, he
proposed his adjusted factor-cost standard.
For GNP to measure production potential, some
strong assumptions are required: chiefly perfect com-
petition, the absence of price distortions in factor
“ This issue is discussed in more detail in Comparing Planned and
Actual Growth Qf Industrial Ouput in Centrally Planned Econo-
mies, Central Intelligence Agency, National Foreign Assessment
Center, Washington, D. C., 1980.
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93-892 O — 8? -14
markets, and the full use of all productive factors. lf
these conditions are met, then the economy will
operate on its production-possibility frontier, where
the production of any product cannot be increased
unless the production of some other product is de-
creased and where the relative prices of the two
products indicates the trade-off.
Bergson hypothesized that the Soviet economy does
not operate on its production-possibility frontier, but
rather on a feasibility locus which is well short of the
frontier. This shortfall of production may result from
bureaucratic inefficiency or from the misallocation of
resources. Bergson further conjectured that the feasi-
bility locus is broadly parallel to the production-
possibility frontier.
Working from this hypothesis, Bergson derived a set
of price rules that would be sufficient to measure the
growth of production potential as represented by the
feasibility locus. These rules form his AFCS. Accord-
ing to Bergson, if the feasibility locus were to ap-
proach the production-possibility frontier, then the
AFCS would also approach the efficiency standard
for valuing national income. Broadly speaking, the
AFCS ensures that prices are equal to average cost
and that factor prices are equal between markets and
proportional to factor productivities.
In particular, the AFCS requires that the following
statements be true:
~ All product prices must resolve into charges for
primary inputs; that is, for land, labor, and capital.
~ The differences in wages among sectors represent
differences in labor productivity and workers’
disutility.
- Rent is charged for the use of superior land and
other natural resources.
- The charge for capital consists of a depreciation
allowance and an interest payment based on a rate
of interest corresponding to the average level of
capital productivity."
~ Commodity prices are uniform within a given mar-
lket area.
" There is a difference of opinion over whether capital stock should
be valued gross or net of depreciation. The capital stock data used
in this study are gross of depreciation.
Approved for Release: 2019/07/19 C05210421