Abstract
Quantity constraints faced by consumers in centrally planned economies prevented official relative prices in those economies from reflecting the subjective trade-offs of consumers. This has important consequences for the methodology of intersystem comparisons of consumption levels as well as the meaning of relative purchasing power. When households are subject to significant quantity constraints, traditional measures of real consumption and purchasing power parity for cross-national comparisons are afflicted with quite a different index number problem than occurs for standard comparisons between typical market economies. Data from the Soviet Union in 1976 are used to illustrate the method.
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Notes
2 My own work on the cost of living in the GDR relied on the detailed consumer price comparisons conducted by members of the German Institute for Economic Research in West Berlin, and one presumes their friends and families in trips to East Berlin. For this paper, a similar critical role is played by the Schroeder and Edwards (1981) purchasing power parity comparisons for the USSR and the USA.
3 One could argue that Gregory Grossman's success in getting us to think seriously about the second economy helped to provide an opening for the welfare standard.
4 This is by no means a weakness. One of the strengths of Erwin Diewert's superlative index numbers is that budget shares and price or quantity relatives are all that are required for their calculation and there is no need for an econometric estimation of the underlying aggregator functions (i.e., utility or production functions).
5 The existence of quantity constraints is also the reason that estimation of demand curves with Soviet price and quantity data would lead to biased estimates of the demand parameters and why it turns out to be necessary to transplant a demand system estimated for market economies in order to interpret observed Soviet consumption choices.
6 Leon Podkaminer (1982), (1988) used demand systems estimated for Irish and Italian consumers to interpret observed Polish consumer demands in this manner.
7 Neary and Roberts (1980) rescued the original Rothbarth paper from relative obscurity that was due perhaps in part to Rothbarth's death in combat during the Second World War fighting for the British. Rothbarth wrote another paper regarding the measurement of household equivalence scales that has become a classic paper in that branch of the economic measurement literature as well. Two papers still cited 60 years after their publication is an impressive indicator of the scientific contributions probably lost due to Rothbarth's premature death.
8 This summary measure was proposed and implemented by Collier (1986), (1988), (1989), (2001) to interpret the GDR family budget data using demand systems estimated from budgets of West German households.
9 For an earlier application of the generalised Cobb-Douglas demand system used here, see Collier (1986), (1989).
10 By force of habit some readers might mistakenly regard the budget shares as constants that would only be true for a traditional Cobb-Douglas world, which is of course just one particular case of the generalised Cobb-Douglas specification.
11 Statistically sensitive readers will be offended by the fact that the ‘independent’ variable on the right-hand side of (5) is in fact dependent in a nonlinear way on the budget shares found on the left-hand side. Fortunately, an obvious instrument to use for two-stage least-squares estimation is an alternate measure of log real total consumption derived by deflating total per capita consumption with an unweighted geometric average of the underying PPPs.
12 Neither word play nor irony is intended here. The Schroeder and Edwards data are certainly not ‘statistical artefacts’ in the (pejorative) technical sense.
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1In the Spring of 1975, the author participated in Abram Bergson's graduate research seminar in socialist economics at Harvard University as a cross-registered MIT graduate student. I am grateful to Paul Gregory for suggesting an important revision to this paper as well as for years of intellectual encouragement.
Appendix A
Appendix A
Weighted two-stage least-squares coefficient estimates. Table A1
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Collier, I. The ‘Welfare Standard’ and Soviet Consumers. Comp Econ Stud 47, 333–345 (2005). https://doi.org/10.1057/palgrave.ces.8100115
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DOI: https://doi.org/10.1057/palgrave.ces.8100115