RUBLES VERSUS DOLLARS

Created: 12/1/1962

OCR scan of the original document, errors are possible

TITLE: Rubles Versus Dollars

AUTHOR: Rush V.

VOLUMB: S ISSUE: Winter YEAR:

STUDIES IN

INTELLIGENCE

A collodion ol articles on the historical, operational, doctrinal, and theoretical aspects ol intelligence.

All staiemenis of fact, opinion or analysis expressed in Studies in Intelligence are those of

the authors 'Ihey do not necessarily reflect official positions or views of the Central Intelligence Agency or any other US Government entity, past or present. Nothing in the conients should be construed as asserting or implying US Government endorsement of an article's factual statements and interpretations.

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Nonsense and significancethe international CNP numbers game.

RUBLES VERSUS DOLLARS

Rush V. Grcenslade*

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* slonai Joint Economic Committeejorris Borniteln of the University of Michigan presented three comparisons of the VS. and Soviet gross national products'" One of these priced both countries* goods and services in dollars, thend priced them both in rubles, and the third was the square root of the product (the geometric mean) of the other two. They showed, respectively, that5 the Soviet GNPf ours when figured Inhen figured in.hen these two were averaged geometrically.

The procedure Bornsteln used was identical with that used by intelligence analysts, and the data and results weretho same. Bornsteln's paper was the first publicof any figure except the geometric mean.

The calculation comparing total Soviet and AmericanIs done in response to the perennial question asked of Intelligence, where does the Soviet economy stand Into ours? Comparing quantities of individualsteel, coal. oil. electric power, cement, grain, tanks,Is necessary and more useful, but people still want an overall comparison, one that is comprehensive. Such comparisons of gross national products In dollar and In ruble prices have therefore been carried out as completely as possible. Themean has been usedbest" single-value answer.

When, however, two alternative calculationa of whatIs the same thing differ so widely asactor ofho meaning and usefulness of the figures or their average are open to question. Since the Joint Economic Committee hearings the use of the geometric/meaneaningful comparison has been challenged by both American and Soviet

V'^ ^Comparisons of flat US. and Soviet Economtes. Jolnl Economic Committee of Congress. USGPO.PartTI-3M.

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vi. Dolla'S

economists for quite dUTercnt reasons. The object of this article Is to set forth the main outlines of the very complex calculations underlying the comparisons, to make clear their conceptual basis, and to show what interpretations of the comparative ratios are consequently justifiable. It willwhy the dollar and ruble comparisons are not so good,

Comparison of two heterogeneous baskets orgodds andin aggregate requires that their contents be measuredommon unit. Standard economic procedure Is to use money values as the unit of measure and to convert each basket of goodsonetary equivalentet of prices. Each good or service in physical unitsons of coal) isby its price per unit) and the resulting values are added together. But what prices should bean International comparison which country's prices, andIn computing growth of output from one period of time to another, which period's prices? The choice, as Mr. Bom-steln's figures show, can be of major quantitative significance.

This now familiar impasse Is referred to by economists as the index number problem. It is conceptually insoluble. It is also universal. It occurs unfailingly in any aggregative comparison between two economic complexes separated in time or space.ew years ago there were nocomparisons basedetailed valuation of oneproduct In another country's prices. Most international comparisons were derived simply by converting the total value of one country's product in its own prices into the currency of another country by the international exchange ratethe two.4 the pioneering study of Gilbert andresented detailed comparisons. production with that of the UK. West Germany, France, and Italy. The results showed that the foreign exchange rate conversions were quite misleading. They also showed that the Indexproblem was significant for all the countries studied

if An International Comparison of national Products and thePower ot Currencies, Milton Gilbert and Irvine B. Kravis, OKBC.flM.

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Rubies vt. Doffori

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The ratio of UK. GNP is slsniWcantly/hlgher in US. prices than it is in UK prices. Here the difference is less than In the. comparison; but inith that of Italy the difference between the two ratios is about as large as with the Soviet. So the differencethe ruble-valued comparison and the dollar-valued one cannot be attributed solely to the artificiality of Soviet prices.

larger when the products are valued at B's jTrtoes than when A's prices are used. This holds for the Western European countries as well as for the USSR. Ineach bilateralwith the United States, theof^the other country's GNP to ours Is larger in dollars than In its own prices. The same systematic bias holds ln comparisons over time.4. ONP5% of that9 prices itpectacular index number spread for timeis found in measuring'the growth of Soviet GNP:rices7 Soviet national product, asby Jazny and Grossman,% of7 prices itf

The economic explanation for the Index number problem Is fairly straightforward. The price pf one kind of goodsto that ot other kinds varies from time to time and place to place. Given transport costs and barriers to trade, relative prices may differ greatly between countries. Everyone iswith differences like the following: wine Is relatively cheap in France, wliile beer is relatively cheap In Germany; domestic servants are relatively cheaper in most foreign countries than in the United States: tuels, oil. coal, andgas are relatively much cheaper here than in Western Europe; meat is relatively very expensive in the Soviet Union but standard machine tools are relatively cheap. Relative prices differ between countries because of differences In taste, culture, and habits and also because of differences in natural resources, capital/labor ratios, stage of development, and other factors that affect the cost of production.

Soviet economic Growth. Abrarn Bergson. ed. Row.. 7.

11

COMfMUENIIAL '

vs. Dollars

Patterns of output also vary between countries, and their varlation Is related to the price patterns. Specifically, each country tends to use and therefore to produce relatively more of the goods which are relatively cheap. This tendencyfor the systematic direction of the Index number bias. To clarify thisumerical example may be helpful. Suppose twoce^ly two commodi-

CountitO

Price per liter per liter Output

(Francs) (mutlon(Marks) (rnllllonliters)

Wine

Beer3 id

Then the total value of output In the two countries can be computed In either country's prices:

Vaiox ot oottdt

In millionmillion Marks

ountryP Country O

wine 20 10

Beer 8 10

Total 28 20

Inine Is cheap relative to beer arid theconsumes relatively more wine, perhaps because the price Is cheap; and the price is cheap because resources forwine are abundant. It Is also possible that wine Is cheap because the population likes wine and has concentrated on the technique of Its production. Inhe wine-beer situation Is reversed. Because of these inverse price and output patterns, country G's total output is greater than F's when measured In francs but smaller than F's whenIn its own currency.

If in this example one substitutes the United States and the USSRnd consumer goods and investment/ defense production for wine and beer respectively. It Is easy to visualize howSoriet index number discrepancy arises. In the United States consumer goods are relatively cheap and Investment/defense goods relatively expensive, and our pattern of output favors consumer goods. In the USSR

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GNP0 AT MARKET IBM

the situation Is reversed. The ratio of Sovietutput Is larger In dollars. prices are relatively higher for the goods the USSR produces in relatively largeAuantlties. The pattern of output by major end uses Is shown in market prices below.

COMPARISON' OF SOVIETBS

per-

dol-

per-

per-

ol

of

of

Investment

447

814

162

2

9

78

38

6

Government admin-

national prod-

Index number problem derives from differences Inof output which In turn derive from differences inand in national preferences. The wider thein patterns of output, the wider the index spread.of developed with underdeveloped countries yieldlarge spreads between the two valuations simplythe patterns of output are so different.

Partisan Positions

As indicated earlier, this problem is insoluble. There Is no ground for choosing between the two alternativelmo-honored expedient has been followed in using their geometric average in publiche compari-

-fltie geometric mean Is used in preference to the arithmetic be. cause economic growth and other changes In general proceedthat Is, constant percentage Increases describe the changes better than constant absolute Increases. The geometric average of two numbers exceeds the smaller of the two by the same percentage as the larger exceeds the average.

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CCJlOMULNlWr

vs. Dollars

son the President made in his press conference of Julythat the Soviet ONPf ours inwas theaverage. This usage has been challenged by bothand American economists. The Soviet economists have come out flatly for tha dollar comparison, in which, of course, Soviet ONP is higher relative to ours. Interestingly enough, their Justification is thatlanned socialist economy price

fact

the ruble valuation Is meaningless. *:

The Soviet argument is specious. As the studies of Gilbert and Kravis show, the index number problem always occurs, and In general the more divergent the pattern of output the wider the spread between the two figures. The patterns. and Soviet production are very divergent indeed. We can estimate how much difference the Irrationality of Sovietdoes make In the ruble comparison. We canonsiderable part (but by no means all) of the distortions In Soviet prices by converting market prices to the Westernconcept of factor costs. Factor costs are calculated by subtracting from market prices any direct taxes included In them, like the Soviet turnover tax, and adding subsidies granted to the industries, The adjustment of Soviet prices to factor costs cannot be carried out In detail becausedata on turnover tax rates by commodity are notPreliminary calculations, however, indicate that the use of factor costs would raise the Soviet GNTercentage of. In rublesew points but would not eliminate the bulk of the index number

Objections by American economists are more serious. Abraham Becker of Rand*"nas argued that the average Is meaningless and should be abandoned, that the ruble and dollar comparisons are equally correct measures of relative output and should be equally and Impartially cited. The basis of his contention is that while the ruble and dollarare precisely defined by the two real price systems used

ratio8 used by the President Incorporated an upward adjustment from market price ratio to aUow lor the effect of factor costs.

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in the calculations, the geometric average of the two does not correspond to any existent price system. Anotheris taken by Francis Hoeber of the Stanford Research Institute, who votes for the dollar comparison* Hisas nearlyan tell, is simply that American prices are more familiar to Americans, who will thereforethe dollar comparison better.

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sons than they can have. The ONP ratiosroad,far from precise meaning, one which tends/to disappear if you try to pin it down.aintly fragrant flower. It can be apprehended by gentle Inhalations, but an attempt to extract the scented oil and subject It to chemical analysis will ruin it

Unknowns fn the Equation

As backgroundetter appreciation of what the ONP Index numbers mean let me outline some of the difficulties inherent in the data used to calculate them.

Procedurally, the conversion of Soviet product values. product values to rubles Is carried out with ruble/dollar price ratios for individual goods and services. The ratios used,ew hundred, aremall sample of all prices In either economy. Each price ratio is applied to those sections of consumption, investment, defense, and government administration for which it Is deemed to be representative:an's suit, shirt, and pair of overalls are taken to be representative of the whole men's clothing category.

The small size of the price samploargin of uncertainly. Worse than that, ito prices the USSR publishes, and it/is therefore weakest In militaryconstruction, and custombuilt equipment. And of course there can be no price ratios for the considerableof both consumer and producer goods produced In the United States but not in the USSR. For many services, such

Soviet Economic Potential. IH6ranela P. Hoeber and Robert W. Campbell. Stanford Research

we must reject on technical grounds any suggestion that the ratios be deaenbed aa faloUj fragrant nam bars

as health, education, and government administration, the product itself, let alone the price, is indefinable. Here we use wage and salary ruble/dollar ratios, thus implicitly assuming that the services of one Russian doctor equal those of one American doctor, and similarly In the other service

.The measurementsarc Inherently quantitative. The

are checked as carefully as possible: an average Russian men's suit is paired not with an average' American suit but with one that appears comparable in quality, well below the American average. But this product-by-producteven if it could be achieved with accuracy, would not take into account the vast difference in diversity and assortment In the two countries. There ls no way to quantify thesebut we know from observation and from Sovietthat supplies of consumer goods of all kinds are badly balanced, some types being in very short supply and others In surplus and unsalable. Diversity and assortment problems are evident in the investment field as well; for example, the range and mix of agricultural equipment is poor by theown admission. Nevertheless,gricultural tractorsertain type are produced they are included in the measure of output, regardless whether thereemand and economic use for that number of these tractors.

Another deficiency in the statistical procedure concerns the value of retail trade services, which is Included In the value of the consumer goods compared. The goodsare kept comparable by matching the physical qualities of individual products, but there is no practical way ofthe quantity or quality of retail service that goes along with the product.ound of ground beef is counted the same in the two countries even If ln one it isby air conditioning, soft music, and quick service, in the other by clouds of flies, pungent odors, and ^terminable queuing.

It is hard to believe that these data deficiencies do not favor the USSR, making the dollar valuation of the Soviet product too large by some few percentage points. On the other hand, as we saw above, the use of ruble market prices rather than

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Rubles vi.Mr**

factor cost overstates. product In rubles. To whatthese two overstatements offset each other Is Impossible to say. For all these reasons, over and above the Indexproblem, the total ONP comparisons should be regarded as order of magnitude Indicators and not as precise measures.

Rationale of the Mean

Let us now return lo the meaning, ofjfttfeTfoolaluations and their geometric'a'verage. Tre"vjUuauWofonecountry's output In Its own or In another country's pricesrecise statistical meaning given it by the calculationhe multiplication of commoditiespecified list of prices. Further, these prices are taken from an actual operating price system. But this is still far from an economic meaning. The price systems of the two countries .subjectilateral comparison are hot the only possible'scales ofconsider the possibility and desirability of multilateral International comparisons. If we were comparingoviet, and West German output there would be three price systems and three sets of ratios forSoviet GNP. Each country added would add another set of comparative ratios. In what sense then Is the dollar or ruble valuation uniquely "correct"?

recise economic sense none of the valuations areTwo production aggregates can be unambiguouslyonly If they are made up of identical proportions ofkinds of goods and services. The comparison ofwith different proportions can be given meaningan assumption about the transferability of resources,for example, that the United States can shiftfrom the present pattern of output to any otherprevailing dollar costs and prices. The dollar ratio of.ould be unambiguously the meas-

ure of comparative outputhe US were to shift resources until its output had the same proportional pattern as the USSR's and if0 dollar value of this output wereSimilarly, If the USSR were to shift resources In the opposite direction, leaving its ruble total unchanged, the ruble, would be unambiguously correct. The two provisos are, of course, highly dubious assumptions. They

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imply that unit costs of production would remain constant at all levels of output for all products.

This argument leads to the mainish to draw. First, the two comparisons could be described better as equally incorrect than as equally correct. Second, theaverage of the two can beefined meaning by

the value of each total output in the domestic currency remaining unchanged. The feasibility ofhift isnot harder to conceivehift of either country entirely over to the other country's pattern. The geometric meanough approximation to the comparison that would hold if the pattern of output in bothean between the present/patterns. In this interpretation Itar from precise but still useful figure Indicative of theoverall size of the two GNP's.

Elements of Challenge

The third conclusion is that the capability for shiftinglies at the heart of these interpretations. Theshed no light on this capability; they require, on the contrary, an arbitrary assumption about shifts in order to have meaning. Thus speciftc questions about capabilitybe answered. For example, how much could each country producepecified list of defense goods and services under full mobilization? One could not deduce an answer from either the ruble or dollar comparison, but only, if at all,etailed study of the mobilization potential of each economy, industry by industry. The output comparisons really tell us nothing about capabilities for producing alternative mixes and hence nothing very precise about relative output. When and if the USSRevel of output% of the TJ.S. in dollar pricesn ruble prices, it will be Impossible, and probably at that stage of the game Irrelevant, to say whether these ratios mean that it has caught up with us.

If the aggregate gnp comparisons are so ambiguous, of what use are they? They havelace In thebattle between the Bloc and West, but their analytical

ollars

usefulness Is limited. The useful quantitative. and Soviet economies is not of total GNP but of its separate segments. The table onhows that although there is an index number discrepancy in theconsumption, investment, and defense components of GNP, itmaller one. This Is because the differencethe two countries In pattern of output for eachend use Is less than in their production patternsreakdown (as detailedGNP's In both sets of prices reveals preclselyjthe divergence In pattern of output which causes the Index number problem in the total GNP comparison and at the same tune Is obscured by the aggregation. The comparisons by end use show also the relative price differences which accompany the differences in output patterns.

The point to be emphasized in conclusion is that overall GNPruble, ornot measure In any significant sense the USSR's economic challenge to the United States. It Is the uses to which productive capacity Is put that are significant. Soviet GNP0 mayrercent of ours, but Soviet defense expenditures areequal/to ours and Investment for growth Is also equal orittle larger than ours.uestion that need hinge on the ow>pii owp comparison. ^much more pertinent information available to VS.dficy makers and also to the general public regardingeconomlc performance, the structure of the economy, theand the USSR's objectives, plans, andIn speeches by the Director of Centraland In many other ways it has been publicly reiterated that the Soviet economy, though significantly smaller than. over all, Is growing much faster, particularly In heavy industry; that its production is concentrated along ominousfor more growth, armaments, and theof new military technology; that Its efforts in these fields are already comparable In magnitude to our own; that it Is devoting its resources with all the power of adictatorshipong-run aim declared Inpromise, "We will bury you."

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