5. SOME PRACTICAL CALCULATIONS BASED ON THE MODEL
In conclusion we would like to make a few points concerning the practical use of price models. During 1964 and 1965 experimental calculations of various types of prices were made with the help of models. These calculations were based on an input-output table of the Czechoslovak republic expressed in terms of value for the year 1962, aggregated to 48 sectors. The information about capital assets was taken from normal statistical sources, which are however grouped according to organizational principles and not according to pure sectors. In calculating various types of prices the data on capital assets were in some cases based on original costs and in others on current replacement costs.
During 1964 and 1965 experimental calculations of various types of prices were made with the help of models. These calculations were based on an input-output table of the Czechoslovak republic expressed in terms of value for the year 1962, aggregated to 48 sectors. The information about capital assets was taken from normal statistical sources, which are however grouped according to organizational principles and not according to pure sectors. In calculating various types of prices the data on capital assets were in some cases based on original costs and in others on current replacement costs.
The experimental calculations were carried out only for a single-level price system without a differentiated turnover tax rate. As the (n + 1)st condition the constant level of retail prices was taken. The following basic types of prices were calculated:
(1) the value type;
(2) the cost type;
(3) the production type;
(4) the F-income type;
(5) the F-two-channel type in the following alternatives:
(a) r = 6, (b) r = 12, (c) r = 18, (d) r = 24 per cent.
The aims of these experimental calculations may be summed up as follows: (a) to prepare and test methods of practical calculations by price models, (b) to demonstrate the relations between individual types of prices, especially in relation to existing prices, under conditions which existed in Czechoslovakia in 1962. Such data can help to achieve a better knowledge of the economic situation and at the same time help to form a realistic basis for discussions about which type of price is most advantageous.
The results of calculations for 48 sectors and various types of prices have been published. The price
indices for the four basic types of prices are given in Table 1. The list of vectors for which the indices
were computed is listed on p. 119.
The values of the parameters for the individual types of prices are shown in Table 2. (The numbers describing the types correspond to the list of price types above).
Statistical indicators which aim to describe macroeconomic aggregates or the shares of individual sectors in the total depend to a great extent on the price system used to evaluate output. The price system in effect until now distorted a number of these indicators. Experimental calculations make it possible to find out what these indicators might be given various types of one-level prices.
During the phase of development which followed, the price calculations were used by the State Planning Commission to accelerate the work being done in preparation for a general reform of wholesale prices, which came into effect on 1 January 1967. By the methods in use until now the preparations for a general reform of wholesale prices took from three to four years. By using price models and computers it was possible to shorten the duration of the preparations to one and a half years.
* Capital assets in purchase prices
Industry branches scheme used for the verification of rational price types
1 Electric-power and heat production
2 Coal mining and processing
3 Oil and natural gas drilling
4 Coke production
5 Gas production
6 Iron and manganese ore production
7 Non-iron metals, garnets, graphite and chemical raw-materials production
8 Ferrous metallurgy
9 Non-ferrous metallurgy
10 Chemicals (including plastics)
11 Oil and tar products
12 Rubber and asbestos products
15 Electrotechnical industry
16 Means of transportation
17 Metal consumer goods
18 Precision mechanics
21 Leather, footwear and fur industry
22 Glass industry
23 Porcelain and ceramics
24 Wood processing, carpentry and joinery
25 Furniture production
26 Wood consumer goods and matches
27 Printing industry
28 Paper and cellulose
29 Building materials
30 Dairy industry
31 Meat, poultry and fish
32 Fats, edible oils, soap, cosmetics and ‘other food processing’
33 Sugar production
34 Spirit, liquors, wine, yeast, vinegar and starch
35 Fruit and vegetable processing
36 Flour, paste products, bakery and fodder industry
37 Confectionary and durable pastry
38 Brewery and malt production
40 Other industrial production, mineral spring and salt production
46 Materials-distribution services
47 Internal trade
48 Agricultural products procurement
The input-output table for 1962 was used as basic data for the calculations connected with the general reform of wholesale prices, but the figures were recalculated into i 964 prices and into the volume of output planned for 1966.
Table 3. Some macroeconomic indicators priced by various
types of prices
* Share of net investment in national income.
The use of the price model during the general reform can be summarized as follows:
(a) A preliminary F-two-channel type of price was chosen, keeping a double price level.
(b) Calculations for several sizes of m and r were made.
(c) On the basis of an analysis of the results and the situation in the national economy the following values were chosen for the reform:
m = 022, r = 0.06
(d) For these parameters, price indices on the basis of a table of 92 sectors were calculated. These indices were directly used to revaluate capital stock and depreciation.
(e) On the basis of a special investigation, data were obtained which made it possible to compute approximate price indices for 24. thousand groups of output.
(f) By means of these indices, prices in the above mentioned groups were recalculated.
A forecast of the development of prices until 1970 was made by the State Commission for Finance, Prices and Wages, during the first months of 1966, with the help of the price model.
Essentially the forecast of price development builds on changes in the cost factors influencing the prices. The resulting price vectors, which were obtained with the help of the model for the year 1970, can be interpreted only as a price base, while real prices can deviate from this base as the result of disequilibrium between supply and demand. It would have been useful to take the influence of supply and demand into account when making a forecast of prices, but sufficient data were not available. In any case, when a forecast for a period of five years is being made it is possible to anticipate that changes in productive capacities and in international trade will be of such magnitude as to balance out the mutual effects of supply and demand.
For the calculations concerned with making the forecast of price development we divided the vector of wage-cost coefficients v, according to (12), into two elements: the vector of coefficients of the direct need for labour l and the vector of wage rates w.
For calculation of the vectors of wholesale and retail prices for 1970 it was necessary to presume the following data (for 1970): matrices A and K, vectors l and w and parameters m, v, r, and the d vector.
These data can roughly be divided into two groups:
(a) Data which from the point of view of the central body are exogenous, or given from the outside. This is particularly true of A, K and 1. Changes in technological coefficients, capital-output coefficients and the direct need for labour depend on changes in technology and are thus not the direct result of economic policy and decision-making. However, in the further development of the model, the possibility of various alternatives in technology, which do depend on centralized decision-making, could perhaps be taken into consideration.
(b) Data which depend on the economic policy of the centre. This is especially the planned vector of wage rates w and the parameters on which the type of price system depends: m, v, r, and d.
The forecast of the development of prices was made in several variants. Several alternative vectors for the year 1970 were calculated, based on different data. This was done for two reasons: (i) for the exogenous factors it is impossible to make exact forecasts of their size; (2) the second type of factor cannot be forecast precisely just because it can be influenced by centralized decisions
In calculating our forecast we chose three different possibilities of how the exogenous factors can develop, from the best to the worst. Besides the extreme points a middle point was also chosen and we thus obtained three sets of possible exogenous factors:
(A, K, l)C for the best economic conditions,
(A, K, l)B for average conditions,
(A, K,l)D for the worst conditions.
For the vector of planned wage rates two alternatives were chosen:
a basic alternative according to which average money wages will be increased by approximately 7 per cent till 1970.
a so-called higher level alternative, according to which average money wages will grow by 53 per cent during the same period.
The parameters m, v, r, and d were also chosen in several alternatives. In all cases n = 0. The so-called basic alternative is calculated with a two-level system of prices, m and r are chosen so as to correspond to the general reform of wholesale prices. Several alternatives of single-level price system with various relations between parameters m and r were also calculated.
Table 4 gives the vectors of wholesale prices for 49 sectors in nine alternatives marked as Az, B, C, D, Acd, E, F, C, H. All indices express the changes which would take place in wholesale prices in comparison to the prices in effect in 1965. Alternative Az is calculated for conditions in 1966 and is in accord with the general reform of wholesale prices. Alternative Acd is also calculated for 1966 and presupposes doing away with the double level system of prices. All the other alternatives are forecasts for1970.
The list of parameters for individual alternatives is presented in Table 5.
Az B C D Acd E F C H
A, K, l 66 aver worst best 66 aver, aver, aver, aver.
w 66 basic basic basic 66 basic basic basic higher
m 0.22 0.22 0.22 0.22 0.68 0.22 0.54 0.67 0.67
r 0.06 0.06 0.06 0.06 0.04 0.117 0.06 0.036 0.036
On the basis of the forecast of the development of wholesale prices several sub-alternatives were later calculated for retail prices on the basis of various forecasts concerning the turnover tax rate.
The aim of the forecast was to gain information about possible changes in price-relations and price-levels up to the year 1970 and to demonstrate to what extent these changes depend on changes in technology and to what extent they depend on economic policy. These calculations make it possible to choose a certain strategy of price policy, which is best for given conditions. At the same time a forecast of the development of prices may contribute to improving centralized as well as decentralized planning and economic decision-making, since it makes it possible to calculate the efficiency of various types of production and investment on the basis of future prices.
Table 4 (part 1).
Price indices development forecast
Table 4 (part 2). Price indices development forecast
Note: Several classification changes were made in the aggregation of sectors. This is the reason why the numbering of sectors in this table does not correspond to the sectors of Table 1,.