It is a well-known problem that macroeconomic indicators calculated for different countries are not directly comparable if the original statistical data are expressed in different prices. This problem can be neglected only if there is a good reason to believe that the relative prices of both countries were reasonably similar. In such a case, it is sufficient to find a “correct” conversion rate between the two currencies.
Should the economic systems of the countries which are being compared, be known to contain very dissimilar mechanisms for price determination, adjustments for the differences in relative prices are also needed. It may be quite difficult to accomplish this task, however, if the actual differences in the relative prices are not known. Therefore, some short-cut method is usually applied. For example, one of the approaches sometimes used in comparisons of capitalist market economies with socialist centrally-managed economies, takes into account only differences between levels of consumer (retail) and producer (wholesale) prices and disregards differences in relative prices within each group. Jerzy Osiatinski 1) has shown that this short-cut method was quite frequently used in reaching conclusions about the price bias generated by the ”two-level price systems” in the East European countries.
He is perfectly right in maintaining that the differences in relative prices can change the picture considerably, but the empirical calculations to which he refers do not fully support his argument, and his theoretical model is not quite satisfactory.
Actually the situation is not as hopeless as he seems to believe. The artificial prices, computable from input-output models, can provide quite a solid ground for the comparison of otherwise incomparable economic indicators. Specifically, they can help to assess the influence of alternative rules for price setting.
In spite of all the difficulties involved, it can be demonstrated that the two-level price system is likely to produce a one-sided bias in certain macroeconomic indicators. It leads particularly to the undervaluation of material costs and of the share of investment in national income as well as to the overvaluation of the share of consumption. Osiatynski claims that such a bias is unidentifiable or even that it does not exist. But this is not true. It is, however, true that the bias may not influence all indicators equally and that it may be negligible in some of them. In a few, rather rare cases, a very special coincidence of technological production, and consumption structures may result in a converse bias.
It will be shown in this paper that the differences generated by deviations in relative prices can also have a consistent and empirically identifiable impact on macroeconomic indicators. The direction of the bias generated by these differences depends on properties of the particular technological matrices, and cannot be assessed purely on the grounds of the theoretical model.
Of course, under special conditions it can happen that both of the above-mentioned influences assume opposite directions for some indicators so that they partly or fully compensate each other. This is probably what happened with the share of investment in the quoted empirical studies; the undervaluation resulting from the two-level price system became partially compensated by the overvaluation resulting from “distorted” relative prices. In this particular case, it was true that the transition from the actual two-level prices to the calculated one-level “prices of production” would not lead to any radical change in the share of investment in the national income. This conclusion is, however, conditional. It cannot be used as an automatic generalization for all countries, all stages of technological development, and all other macroeconomic indicators.
The empirical calculations used by Osiatynski also show a considerable price bias in other important macroeconomic indicators - particularly in the share of total material costs in gross social product and in the share of wages in national income.