A COMPARISON OF SOVIET AND US GROSS NATIONAL PRODUCTS 1960-83

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• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00313R000200060004-2
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 32
• Document Creation Date: December 21, 2016
• Document Release Date: March 5, 2009
• Sequence Number: 4
• Publication Date: August 1, 1984
• Content Type: REPORT

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Intelligence
A Comparison of
Soviet and US
Gross National Products,
1960-83
Secret
SOV 84-10114
August 1984
488
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Directorate of Secret
Intelligence
A Comparison of
Soviet and US
Gross National Products,
1960-83
This paper was prepared by Office
of Soviet Analysis. Comments and queries are
welcome and may be directed to the Chi, ef,
Econometric Analysis Division, SOYA,
Secret
SOV 84-10114
August 1984
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Summary
Information available
as of 1 March 1984
was used in this report.
1960-83
A Comparison of
Soviet and US
Gross National Products,
of living than any capitalist country by 1981
Economic strength is a major determinant of international power. The
Soviets have clearly recognized this relationship in numerous public
statements over the years. The most famous of these were made by
Khrushchev, who boasted that the Soviet Union would outproduce the
United States by 1970 and that his country would have a higher standard
Figure 1
Soviet GNP as a Percentage of US GNP,
Selected Years'
1960
] 49
65
] 49
70
]
55
75
58
80
]
55
83
]
55
cent of US GNP in 1981 and remaining at that level through 1983.
These forecasts have not come true, although the Soviets have made some
progress. A comparison of the annual outputs (gross national products) of
the two countries shows that the Soviets gained on the growing US
economy between 1960 and 1975, as their GNP rose from 49 to 58 percent
of the US total. After 1975, however, they lost ground, dropping to 55 per-
The elements of GNP leading the shift since 1975 were defense and 25X1
investment. Average annual Soviet growth rates in these areas were
markedly lower in the 10th Five-Year Plan than in earlier plan periods and
were lower than corresponding American rates. The level of the Soviet
defense effort, however, has remained substantially above that of the
United States since the early 1970s. The relatively slower Soviet growth in
defense and investment outweighed a small relative gain by the Soviets in
consumption, even though consumption was by far the largest share of
GNP in both countries. While the Soviets gained in both per capita and to-
tal consumption, their per capita consumption was still only slightly more
than one-third that of the United States in 1983. 25X1
iii Secret
SOV 84-10114
August 1984
:' Measured by calculating the
geometric mean of the percentages
expressed in 1970 rubles and 1976
dollars.
b Preliminary.
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We believe the gap between the two economies that began to widen after
1975 will continue to increase in the near term. We expect Soviet GNP
growth for the rest of the decade to average below the 3 to 4 percent pre-
dicted for the US economy by US forecasters. If these projections are
accurate, Soviet GNP in 1990 will be back down to less than half the US
figure.
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Summary
iii
Background and Approach
1
GNP Comparisons
3
Trends in Aggregate Comparisons
3
Implications of the Comparisons
8
A. General Methodology of Soviet-US Economic Comparisons
11
B. Differences Between Civilian PPP Ratios and
Military Ruble-Dollar Ratios
C. Measuring Comparative Soviet and US Defense Burdens
21
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A Comparison of
Soviet and US
Gross National Products,
1960-83
Background and Approach
Gross national product (GNP) is the total market
value of all final goods and services produced by a
nation's resources in a year. It is frequently used to
compare the size of a country's economy with that of
another.' Comparisons of this type are particularly
important to foreign policy formulation because the
relative size of a country's GNP represents the rela-
tive availability of national goods and services for
pursuing given policy options. Economic strength
compared with that of any other country or combina-
tion of countries is thus a primary determinant of
international power. As the first US Government
study comparing Soviet and US GNPs stated in 1955:
In the struggle between the Communist Bloc
and the Free World, the factor of relative
economic strength is fundamental. Neither mo-
rale nor political stability nor a firm military
posture can long be sustained in its absence....
A continued, dynamic economic growth, match-
ing or surpassing that of the Communist Bloc,
would seem to be indispensable for the mainte-
nance of world stability and as a force for world
peace.'
Periodic comparisons of Soviet and US GNPs there-
fore serve as yardsticks with which US policymakers
can gauge the relative economic strength of the
world's other superpower.
in GNP terms. Rather, they use a Marxist concept of national
income that excludes "nonproductive" uses of resources (most
services and some depreciation). CIA analysts and other Western
economists find it more useful to analyze Soviet economic data in
The Soviet leadership has long been keenly aware of
the USSR's secondary status as an economic power.
Stalin and Molotov both exhorted Soviet workers to
overtake the West. But Khrushchev transformed the
long-held Soviet objective of "catching up" with
America into a pressing national goal. In the late
1950s he promised that the Soviet Union would
surpass the United States in total and per capita
output within the decade. In October 1961 he boasted
at the 22nd Party Congress that the Soviet Union
would have a higher living standard than any capital-
ist country by 1981. In addition, he stated that the
USSR's industrial output would be twice the 1961
level of the entire nonsocialist world in 20 years. F_
Khrushchev's dreams did not materialize, but the
Soviets have made considerable progress since 1960.
Industrial production has shown substantial gains,
and increased production of consumer durables and
food indicates a generally higher standard of living for
the present Soviet consumer than his counterpart two
decades ago. By no means, however, did the Soviets
"bury the enemies of the Revolution" as Khrushchev
claimed they would.'
The development of the Soviet economy relative to
that of the United States since 1960 may be traced by
comparing trends in aggregate GNP and changes in
the major GNP categories (consumption, investment,
and defense). Consistent comparisons of these two
dissimilar economies are made by expressing their
national outputs in the monetary unit of one country
or the other. The generally preferred procedure for
' Crankshaw, Edward (ed.), Khrushchev Remembers, Bantam
Books, New York, N.Y., 1971, p. 563. In his memoirs, Khrushchev
claims that his statement about "burying" the United States was
misrepresented by the Western media. He said his intended
meaning was that the US "working class" would bury the Ameri-
can "bourgeois class." Nevertheless, the American public at the
time perceived the statement as an open economic challenge.
' Trends in Economic Growth: A Comparison of the Western
Powers and the Soviet Bloc, Joint Economic Committee (JEC),
Washington, D.C., 1955, pp. iii-iv (letter of transmittal from Grover
Ensley, Staff Director of the JEC, introducing the study by the
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making international economic comparisons is to con-
vert each country's GNP into the currency of the
other country (Soviet Union in dollars and United
States in rubles). Two GNP comparisons can then be
made, one in rubles and one in dollars.
The two comparisons will yield different results. This
phenomenon is commonly known as the index number
problem, and it results from differences in the relative
prices and quantities of goods and services found in
each country. Goods produced in relatively large
quantities in either country tend to sell at relatively
low prices in that country, and vice versa. Soviet GNP
is, therefore, a larger percentage of US GNP when
comparisons are made in dollars, since dollars place
greater weight than ruble prices do on investment and
defense goods, which account for larger shares of
output in the Soviet Union than in the United States.
The important point about index numbers is that
valuations in rubles and those in dollars are equally
correct. When a single figure is needed, economists by
convention often resort to the "geometric mean" of
the two as a reasonable point estimate that falls
between the ruble and dollar comparisons. This paper
will follow the geometric mean convention, although
the reader is cautioned that it is used for its presenta-
tional convenience and does not, strictly speaking,
represent a more valid result than that calculated in
either currency.' The actual ruble and dollar compari-
sons can be found in appendix D, but the geometric
mean estimate will be given in the body of the paper
for simplicity.
Converting Soviet and US GNPs in national curren-
cies to the other's currency involves the use of special-
ly constructed price ratios, called purchasing power
parities (PPPs).5 These ratios measure the relative
values of comparable goods and services found in both
countries at the same time. Price ratios for individual
goods and services can be aggregated into collective
Appendix A contains a more detailed discussion of index numbers,
as well as descriptions of the conce ts, assumptions, and methods
used in the comparison.
' The concept behind military ruble-dollar ratios used in comparing
defense activities is somewhat different from that employed in
constructing civilian PPP ratios. Differences in the ratios are
explained in appendix B. Even though both types of ratios are
generically called "ruble-dollar ratios," this paper for clarity will
arbitrarily reserve that nomenclature exclusively for the military
PPPs by using either Soviet or US expenditure
weights derived from respective national spending
patterns. The resulting weighted ratios measure the
relative values of items in groups, such as consumer
durables, and eventually in categories, such as con-
sumption. "Established prices," administratively set
Soviet prices, are used in the ratios because they
represent what Soviet consumers would see. "Factor
cost prices," prices that would be charged if they
represented the actual costs of resource inputs, are not
used in the ratios because they are not available in
sufficient detail. The comparisons in this paper, then,
are closer to measures of real income differentials
than to measures of relative production potential.b 7
Over time, prices in one country change relative to
those in another. Consequently, a comparison using
the PPP ratio methodology, such as the one made by
the CIA, requires periodic updating to remain valid.
This paper presents the results of an updated compari-
son using recently completed and revised PPP ratio
studies.' PPP ratios in 1955-56 prices formed the basis
of US-Soviet GNP comparisons developed by the CIA
until 1979. In the comparisons published that year,
the older ratios were replaced by the preliminary
results of new consumption and investment PPP ratio
studies in 1976 prices! The final results of these
studies have been incorporated into this paper.
6 See appendix A for a fuller discussion of the differences between
measures of income differentials and production potential.
' The PPP studies upon which the analysis in this paper is based
provide a more detailed explanation of the classification and
weighting schemes involved in derivin consumption
invest-
ment PPPs than is presented here.
' See Edwards, Imogene, et al., "US and USSR: Comparisons of
GNP," Soviet Economy in a Time of Change, JEC, 1979. Some
readers may be accustomed to seeing analysis in a more current
price base. The dollar GNP comparisons could have been indexed
to a more current base, but it was felt that the characteristicness of
the price sample was better preserved if dollar prices were left in
the price base of the study. Integration of defense, which is in 1970
rubles, was judged to be a compelling reason to index the ruble
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Figure 2
Soviet GNP as a Percentage of US GNP,
1960-838
rates during the Eighth and Ninth Five-Year Plans
(FYPs) were higher than American rates during the
same periods. Soviet growth, however, had been slow-
ing since at least the mid-1960s, and the relationship
between the two economies began to shift in Ameri-
ca's favor in the 10th FYP (1976-80) as the decline in
Soviet growth rates continued while US growth accel-
erated.
Short-term variations in US-USSR GNP compari-
sons generally reflected business cycle movements in
the US economy. It is not surprising that a market
economy experienced more pronounced fluctuations
than a centrally planned economy. Planning tends to
promote economic stability by controlling fluctuations
in demand, although plan goals may not be met for a
variety of reasons. Agricultural output, for example, is
I I I I I I I I I I I I I I I I I I
0 1960 65 70 75 80 83b
a Measured by calculating the geometric mean of the
percentages expressed in 1970 rubles and 1976 dollars.
b Preliminary.
Trends in Aggregate Comparisons
Between 1960 and 1983, Soviet GNP expressed as a
proportion of US GNP increased 6 percentage points
(geometric mean). It rose from 49 percent of US GNP
in 1960 to a peak of 58 percent in 1975 and fell back
to 55 percent by 1981 (figure 2)." The Soviet Union
gained on the United States from the mid-1960s to
the mid-1970s because average annual Soviet growth
To give the reader a sense of the spread between the dollar and ru-
ble comparisons encompassed by the geometric mean, Soviet GNP
in 1983 was 67 percent of US GNP in dollars and 46 percent in
rubles. The spread between the two comparisons has fairly steadily
decreased since 1960, when Soviet GNP was 62 percent of US
GNP in dollars and 38 percent in rubles. Ruble prices, where given,
will be expressed as constant 1970 rubles; and dollar prices, as
United States in those years.
influenced by weather conditions, and swings in agri-
culture were the major cause of annual swings in
Soviet GNP. As a rule, though, the Soviet GNP was
less volatile than the US GNP. The GNP comparisons
moved sharply in the Soviets' favor during the US
recessions in 1970 and 1974-75, when US growth
rates dropped well below Soviet rates. Similar shifts
did not occur in the US recessions of 1980 and 1982
because Soviet economic growth had deteriorated to a
point where it was only slightly better than that in the
Although the Soviet Union gained ground relative to
the United States over the 20-year period as a whole,
the absolute size of the gap between the two econo-
mies in goods and services produced annually in-
creased, whether measured in rubles or dollars (fig-
ures 3 and 4). The US recessions of 1970, 1974-75,
1980, and 1982 caused the gap to lessen in those
years, but the trend has been upward, and the gap
widened noticeably after 1976. Between 1961 and
1983, US GNP grew $300 billion or 285 billion rubles
more than Soviet GNP.
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Figure 3 Figure 4
Ruble Difference Between Soviet and Dollar Difference Between Soviet and
US GNPs, 1960-83 US GNPs, 1960-83
I N i i r e ;1 i r,1i i r"11-117] I[ 1 I Ifs I I R M] I N I I* ,.] 1 501 1 1 91,
0 1960 65 70 75 80 83a 0 1960 65 70 75 80 83?
Soviet
US
Absolute difference
Trends in GNP Components 10
Defense. The most striking difference in trends be-
tween the two countries since 1960 has been in
defense. The Soviet defense effort passed that of the
United States in the early 1970s. Real decreases in
US defense spending occurred between 1969 and
1976 as the United States disengaged from Vietnam,
while consistent growth pushed the Soviets over 40
percent higher than the United States by the mid-to-
late 1970s (figure 5). Since reaching a post-Vietnam
10 The estimates in this paper were prepared with data ending in
1981. Preliminary estimates for 1982 and 1983 were prepared using
rough aggregate indexes. These could not be applied at the
component level, but an update is under way that will extend the
US
Absolute difference
low in 1976, real US defense costs have increased
while the growth rate of Soviet defense has slowed,
narrowing the defense gap to about one-third by
1981."
Defense has also been the category of GNP use where
the greatest difference in GNP composition between
the two economies exists. The United States halved
the share of GNP going to defense following Viet-
nam-from 10 percent in the early 1960s to 5 percent
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Figure 5
Soviet Defense as a Percentage of
US Defense, 1960-81 a
Figure 6
Soviet and US Defense Burdens,
1960-81a
0 1960 65 70 75 80 81
" CIA defense comparisons have traditionally been
made in dollars or rubles. This figure presents the
geometric mean of the two comparisons for consistency
with the rest of the figures in this paper.
I I I I I I I I I I I I I I I I I I I I i I
0 1960 65 70 75 80 81
" Defense burdens are measured in national currencies
(that is. rubles for the Soviet Union and dollars for the
United States) and according to a US definition. The
Soviet defense burden is presented as a range of ? I
percentage point around a point estimate because of
the uncertainty in the estimate. This range was not stat-
istically derived. Similar ranges are not presented for
the other elements of Soviet GNP because we have
somewhat higher confidence in those data.
in the early 1970s. The Soviets, on the other hand,
had a fairly steady defense burden estimated at 10 to
14 percent of GNP over the period (figure 6)."F--
" These burden. estimates use a US definition of defense. They
could also be calculated using a Soviet definition, which we believe
would include more activities (primarily civil defense and civil space
activities that in the United States would be funded by NASA).
The US defense burden remains nearly the same whether a US or
Soviet definition of defense is used because the costs of US civil
defense and civil space activities are small relative to the defense
budget. The Soviet defense burden would increase by 1 to 2
percentage points if a Soviet definition were used. The Soviet
definition is appropriate in a noncomparative context when defense
appropriate burden calculation is that in which both defense and
GNP are measured in the currency of the given country. See
Investment. Trends in total investment growth were
also very different. Total Soviet investment grew
almost twice as fast as US investment over the 1960-
81 period; it averaged 6 percent annually, while US
investment averaged about 3 percent a year. The
absolute level of Soviet investment stayed about 60
percent of the US level through the mid-1960s, rose to
80 percent in the early 1970s, and exceeded US
investment in 1975, 1976, and 1981 by a small margin
(figure 7).
Even so, the growth rate of Soviet investment has
been declining since the early 1960s, and investment's
markedly lower growth rates during the 10th FYP
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Figure 7
Soviet Investment as a Percentage of
US Investment, 1960-818
75
I I I I I I I I I I I I I I I I I I I I I I
0 1960 65 70 75 80 81
were a major factor behind the United States' ability
to considerably widen the GNP gap by 1981. US
investment, on the other hand, experienced the wide
fluctuations common to a market economy's business
cycles over the 1960-81 period but grew faster than
Soviet investment on average during 1976-80
Soviet gains in comparative levels of investment were
most pronounced in the area of construction because
of the relatively greater facilities expansion in the
USSR. Soviet construction investment rose from 63
percent of the US level in 1960 to 119 percent by
1981 (figure 8). The value of the machinery and
equipment component of Soviet investment also in-
creased relative to that of the United States over the
entire period but stayed below the US figure. Under-
lying these trends is the general tendency in the
United States to devote more investment resources to
reequipping older facilities and to design more exten-
sive use of mechanical and electronic equipment into
new facilities.
Figure 8
Soviet Investment as a Percentage of
US Investment, by Component, 1960-818
iii I I I I I I I I I I I I I I I
0 1960 65 70 75 80 81
The USSR has devoted a greater share of its econom-
ic resources to investment than has the United States
since 1960. Soviet investment steadily increased from
a low of 21 percent of Soviet GNP to a high of 30 per-
cent by 1981, while US investment fluctuated be-
tween 17 and 20 percent of US GNP over the 1960-81
period (figure 9)." Soviet investment for machinery
and equipment (including comparably estimated capi-
tal repair)" steadily increased from 5 percent of Soviet
" US national income accounts may include some government
expenditures that could be considered investment, such as hydro-
electric plant and dam construction, in categories of government
purchases of goods and services. An adjustment for this possible
accounting anomaly has not been made because US national
accounts were accepted as given by the Commerce Department.
Should an adjustment be made, US investment would take a higher
share of US GNP.
" This paper uses the standard definition of capital repair as the
sum of outlays on noncurrent repair of fixed assets. Unlike current
maintenance outlays, capital repair outlays are not written off as
current costs but are capitalized. The book value of the asset is
raised to reflect this type of repair, which is supposed to extend the
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Figure 9
Composition of Soviet and US Investment,
1960 and 19818
GNP in 1960 to 13 percent by 1981, while Soviet
construction plus comparable capital repair remained
between 16 and 18 percent of GNP. In the United
States, machinery investment increased from 5 to only
9 percent of GNP in those years, while US construc-
tion's share steadily decreased from 13 to 9 percent.
Consumption. The Soviets have gained slightly on the
United States in total consumption since 1960. Soviet
consumption over the period fluctuated between a low
of 37 percent in the mid-1960s and a high of 42
percent of US consumption in 1981 (figure 10). F_
Within the consumption category, Soviet health ex-
penditures showed the most.dramatic change by
steadily dropping from 67 percent of US health
expenditures in 1960 to 38 percent by 1981 (figure
11). This was a consequence of US health costs rising
much more rapidly than those in the Soviet Union.
small but consistent relative gains
Education costs in the Soviet Union began the period
at or above the US level, dropped to 86 percent as US
expenditures accelerated in the late 1960s and early
1970s, but returned to comparable levels by 1981. In
the other consumption categories of food, soft goods,
durables, and household services, the Soviets showed
The Soviet Union is unusual among developing coun-
tries in that its economy has not become increasingly
service oriented. The Soviet service sector remained
relatively steady at 19 to 21 percent of Soviet GNP
between 1960 and 1981, while the US service sector
increased from 33 to 39 percent of US GNP by 1975
before falling slightly to 37 percent by 1981 (figure
12). In both countries, the share of GNP devoted to
durables increased, soft goods consumption remained
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Figure 10
Soviet Consumption as a Percentage of
US Consumption, 1960-81 a
I I I I I I I I I I I I I I I I I I I I I I
0 1960 65 70 75 80 81
about the same, and the share going to food de-
creased. Food consumption as a share of GNP
dropped by as much as 7 percentage points in the
Soviet Union and by 4 percentage points in the United
States over the period
Because consumption is by far the largest component
of GNP in both countries, changes in relative con-
sumption have a major impact on comparisons of
overall GNP. By themselves, these changes for 1960-
81 tended to raise slightly Soviet GNP relative to US
GNP during this period, but they were partially offset
by the changes in defense and investment discussed
earlier. Average annual growth rates of Soviet con-
sumption in the 10th FYP (3.2 percent in rubles and
2.9 percent in dollars) were higher than those of the
Soviet economy as a whole. At the same time, average
annual growth rates for US consumption after 1975
were lower than those for the US economy as a whole
for that period. These shifts consequently raised the
share of consumption in Soviet GNP, lowered it in US
GNP, and slightly improved Soviet consumption rela-
tive to the United States over the period 1975-81
(figure 13).
Relative standards of living are usually measured in
terms of consumption per capita. The Soviet consumer
was less well off compared to his American counter-
part when consumption is measured on a per capita
basis than is indicated by the aggregate consumption
comparison. This is because the Soviet population was
15 to 20 percent larger than the American population
over the 1960-81 period. The trends over time of the
per capita and aggregate consumption comparisons,
however, are essentially the same because the popula-
tions of both countries grew at the same average
rate-about 1 percent a year. Soviet per capita con-
sumption rose slightly over the 1960-81 period, from
31 percent of US per capita consumption in 1960 to
36 percent in 1981. As in the aggregate consumption
comparison, Soviet health expenditures showed the
most change, dropping from 57 percent of US per
capita health expenditures in 1960 to 33 percent in
1981. The other categories of education, food, soft
goods, durables, and household services showed slight
overall relative gains for the Soviets.
Quite obviously, the Soviet Union did not achieve
Khrushchev's goal of outperforming the American
economy by 1981. It was, however, slowly gaining
ground until the mid-1970s. Why did it fail to
continue catching up during this period, and what are
the implications of this failure for future economic
competition?
Soviet GNP growth has been on a downward trend
since the late 1960s, but this trend worsened in the
late 1970s for a number of reasons. Some were
beyond the Soviets' control, such as bad weather,
unfavorable international economic conditions, and a
decline in the growth rate of the working population.
Others included aging of the capital stock-which
requires increasingly larger investments to keep it
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Figure 11
Soviet Consumption as a Percentage of
US Consumption, by Component, 1960-81 a
I I I I I I I I I I I I I I I I I I I I I I
0 1960 65 70 75 80 81
Figure 12
Composition of Soviet and US Consumption,
1960 and 1981
I I I I I I I I I I I I I I I I I I I I I I
0 1960 65 70 75 80 81
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Figure 13
Composition of Soviet and US GNP,
1960 and 1981
productive-and mounting shortages of key raw ma-
terials and energy sources. Still others were the results
of planning decisions, particularly the decision imple-
mented in 1976 to switch from an "extensive" invest-
ment policy that expanded production through large
increases in capital and labor to an "intensive" policy
of growth achieved by more efficient use of re-
sources.15 Bad investment decisions also led to insuffi-
cient resources being devoted to transportation, which
created shortages of rolling stock and massive bottle-
necks. Finally, some of the causes of the downturn in
growth rates may be endemic to the Soviet system of
central planning. The planning process, with its em-
phasis on meeting production quotas, seems to have
stifled innovation and creativity, which are vital to
improving productivity. Lack of wage incentives and
limited availability of consumer goods also have been
drags on productivity growth.
If the US economy continues to perform as well as it
has over the last year, the gap between the US and the
Soviet economies is likely to widen considerably in the
next decade. Opinion is certainly not unanimous on
whether the United States can sustain this growth,
but the consensus of estimates developed by leading
private forecasting groups shows average annual
growth rates of 3 percent or more through the mid-to-
late 1980s.16 Soviet growth, on the other hand, is
projected by the CIA to be below this rate for the rest
of the decade." If these projections prove accurate,
Soviet GNP in 1990 will be back down to less than
half the US figure. There is little reason to expect
Soviet growth to exceed that of the United States on
average during the rest of the decade. At best, Soviet
GNP in 1990 is unlikely to be more than the 55
percent of US GNP estimated for 1983, and it
probably will be less.
16 Based on 1983-90 projections of average annual growth rates
from Wharton Econometric Forecasting of 3.1 percent and Data
Resources of 3.3 percent. Chase Econometrics predicts 3.7-percent
average annual growth between 1983 and 1985, and Evans Eco-
nomics predicts 3.1 percent for the same period.F -1
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Appendix A
General Methodology of Soviet-US
Economic Comparisons
This appendix gives a general description of the
methodology used in making the Soviet-US economic
comparisons presented in this paper. The first section
discusses some of the important basic concepts of
international comparisons. Following sections outline
the key assumptions upon which the Soviet-US com-
parisons are based and examine the composition of
each GNP category. Finally, the comparisons are
evaluated in terms of their validity, usefulness, and
the confidence we have in them.
Comparisons of any two economies must value each
country's assortment of goods and services in some
common unit of measure. One of the two techniques
most widely used today to convert data measured in
one country's prices into another's price base uses
international currency exchange rates; the other uses
purchasing power parity ratios. This section discusses
the reasons PPP ratios are preferred, what they
measure, and how they are constructed. It also exam-
ines a way to handle the sometimes troublesome fact
that a two-country GNP comparison can be made
using either country's prices as a base.
Purchasing Power Parities and Weighting Schemes
Exchange rates are determined mainly by supply and
demand for internationally traded goods and services
and by international capital transactions. Consequent-
ly, they are not satisfactory for GNP comparisons
because they do not reflect the relative purchasing
power of different currencies over the whole range of
goods and services produced and consumed. They are
frequently used for comparisons, however, because
they are easily available from open sources for most
ratios that indicate the number of rubles required to
purchase the same quantity of goods and services that
could have been bought with a given amount of US
dollars, and vice versa.18 The exception is defense
comparisons, which involve a somewhat different con-
cept."
Exchange rates may differ greatly from PPP ratios,
especially when comparisons involve economies with
substantially different price structures. In fact, stud-
ies have shown that the purchasing power of the
currency of low-income countries relative to that of
very-high-income countries is often two to three times
as great as the exchange rate would indicate.' In the
case of the USSR, moreover, the value of the ruble
relative to other currencies is artificially maintained
by the Soviet Government and has no direct connec-
tion to relative purchasing power. Therefore, the
ruble/dollar exchange rate cannot be used as even a
rough measure of relative purchasing power.
Comparability of products and services is the key to
useful PPP ratios. Comparability may be defined
many different ways, but CIA PPP ratio studies for
the United States and the USSR define it in terms of
function and performance. For example, a three-phase
Soviet AC electric motor with a 40-kilowatt capacity
that operates at 1,500 rpms was judged to be repre-
sentative of a type of Soviet general purpose electric
motor used in a wide variety of industrial applications.
1B The purchasing power of a ruble and a dollar varies widely among
individual commodities. For example, in 1976, 43 cents bought as
much canned orange juice in the United States as 1 ruble bought in
the USSR, but it took over $5 in the United States to purchase the
same amount of frozen cod sold in the USSR for 1 ruble.
military ruble-dollar ratios.
ro Kravis, Irving, et al., World Product and Income, International
Comparisons of Real Gross Product (Phase III), Johns Hopkins
countries.
We rely instead on PPP ratios. These ratios measure
the relative value of a comparable set of goods and
services found in both countries at the same time
when measured in each country's prices. The GNP
comparisons in this paper in general are based on PPP
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Figure 14
Construction and Use of Machinery and
Equipment PPP Ratio
0.8 kw
1.1 kw
4.5 kw
10 kw
40 kw
75 kw
100 kw
200 kw
250 kw
1,000 kw
4,000 kw
of electric
motor output
Electric motors
Generators
Transformers
High- voltage
apparatus
of electro-
technical
output
Note: Highlights refer to example described in text of PPP waiting scheme for
40 kw motor.
A comparable US motor with similar specifications
and functions was identified, and the ruble price of
the Soviet motor was compared with the dollar price
of the US motor to form a PPP ratio for this
particular item.
The usefulness of a PPP ratio for a specific item is in
its relation to a larger group. It is used to generate a
PPP ratio applicable to an entire product line; that
product PPP ratio is used to generate a ratio applica-
ble to a still larger group, and so on. Individual PPP
ratios are aggregated into more comprehensive PPP
ratios by calculating weighted averages-the weights
reflecting an item's importance in total value of
production. Two sets of weighted ratios must be built
up. Ratios required to move Soviet GNP from rubles
to dollars are called Soviet weighted because they use
as weights Soviet expenditures derived from official
Type of machinery Value shares Investment
group of machinery subcategory
Electro-technical output Construction
Energy and power Machinery and
Cable products equipment
Machine tools
Forge-press
Casting
Tools and dies
Precision
instruments
Mining and
metallurgical
Pumps and
compressors
Logging and paper
Light industry
Food industry
Printing
Hoist-transport
Construction
Transportation
Automobiles
Tractors
Other
Soviet statistics. US-weighted ratios use US expendi-
tures compiled by the Department of Commerce as
weights so that US GNP in dollars can be put into
rubles.
A simplified schematic of the weighting process for
machinery and equipment PPP ratios is shown in
figure 14. The product PPP ratio for electric motors is
calculated from individual motor PPPs weighted by
their share of electric motor output. This and other
product PPP ratios are then weighted by their share
of electrotechnical group output to derive a group
PPP ratio. Machinery group PPP ratios are then
weighted with shares of machinery output to calculate
a PPP ratio for the machinery and equipment subcat-
egory.
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The Index Number Problem
In making Soviet-US comparisons, we encounter a
phenomenon common to all international economic
comparisons-the so-called index number problem. It
arises because the comparison in rubles yields a result
different from the comparison in dollars, yet both are
equally legitimate.
The lack of a single quantifiable comparison can be
presentationally awkward, so economists by conven-
tion often resort to the "geometric mean" as a basis
for a single comparison. In the case of two countries,
the geometric mean is the square root of the product
of the two comparisons. However, the theoretical
justification of the geometric mean as a valid average
indicator in economic comparisons is disputed. Abra-
ham Becker argues against its use in US and Soviet
comparisons because "the average reflects neither the
dollar nor the ruble price pattern and in principle,
therefore, is simply wrong."21 Paul Samuelson, on the
other hand, believes that use of the geometric mean
"does seem more evenhanded."22 This paper adopts
the geometric mean convention, but the reader should
remember that a geometric mean represents neither
the ruble nor dollar comparison and may therefore be
inferior to the more general estimate defined by them.
For the comparisons in this paper to be useful, a
number of analytical conditions must be met or at
least reasonably approximated. First, the base year
for the PPP ratios must be considered a reasonably
typical year from an economic standpoint. The com-
parisons in this study are based on a sample of PPP
ratios in 1976 prices. The comparisons, therefore, are
only representative of other years to the degree that
economic conditions in 1976 and, in particular, rela-
tive prices both within a given country and between
countries can be assumed to be typical for those other
years. Unusual supply or demand conditions in either
country in 1976 would distort the relative prices and
cause the comparisons to be biased
21 "Comparisons of United States and USSR National Output:
Some Rules of the Game," World Politics, vol. XVIII, No. 1,
The choice of 1976 as a base year has merit for
several reasons. On the Soviet side, the 1976 decision
to reduce the rate of investment growth took time to
work its way through the economy. Its most dramatic
effects on industrial production, consumer prices, and
GNP seem to have been delayed until 1979-81, as
shown in table 1. Thus, 1979-81 may have been
atypical, but 1976 was more or less an "average" year
by Soviet standards.
For the United States, 1976 was a year of strong
economic growth following the severe recession of
1975. In this sense, it is typical of the growth rates in
the 1962-66, 1972-73, and 1977-78 periods. It also
was not marked by an unusual swing in industrial
production, and inflation had not yet reached the high
rates of the late 1970s.
Comparisons for years other than the 1976 base year
involve greater uncertainty the more distant the com-
parisons are from the base year. Changes in relative
prices from the base year relationships are more
likely. In addition, US GNP in current prices must be
deflated to 1976 dollars using price deflators that are
subject to error. Soviet GNP must be estimated for
years other than 1976 by moving 1976 weights with
quantity indexes of output, and this process inevitably
introduces some distortion. Comparisons of US and
Soviet GNPs in 1960 and 1981, for example, are
therefore less reliable than those for 1976.
In this paper we assume that valid comparisons of
defense efforts can be made using ruble prices from a
year other than the one on which the PPP ratio
studies were based. This assumption is necessary
because we make our estimates of Soviet defense
spending in constant 1970 rubles, and we have no
reliable basis for moving these data to an equivalent
1976 base. Ruble estimates of GNP in this paper,
therefore, were also made in constant 1970 rubles
rather than constant 1976 rubles to better facilitate
the incorporation of our defense estimates. This re-
quired indexing the ruble prices in the PPP ratios to
1970 prices. The reindexing was carried out at the
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Table 1
US and Soviet Economic Indicators
Industrial production a
(1970=100)
United States 61 83
Consumer price index a
(1970=100)
GNP Growth (percent change from
preceding year)
4.0
2.2
6.3
6.0
lowest level of aggregation possible, usually the sub-
category level but down to the group level in some
cases. We recognize that this process could introduce
some distortions in the comparisons to the extent that
1970 ruble price relatives are different from those for
1976. We decided this would introduce less distortion,
however, than arbitrarily choosing a rate of inflation
for defense.
Lastly, we assume that reasonable comparisons can be
made for dissimilar economies. Comparisons are gen-
erally considered more reliable for countries with
similar levels of development and social systems. For
countries at different stages of development, such as
the United States and the Soviet Union, comparisons
in alternative prices tend to overstate the relative
position of the less advanced country. The more
advanced country could shift to a less complicated
product mix more easily than the less advanced
country could produce the more complicated assort-
ment of goods and services of the advanced country.
The United States turns out goods and services that
the Soviet Union cannot produce at all because of the
widely noted Soviet difficulty in manufacturing high-
quality and technologically complex goods. Therefore,
the ruble comparison of Soviet and US GNPs proba-
bly overstates the relative ability of the USSR to
produce the US output mix because it understates the
ruble costs of US state-of-the-art technology. The
dollar comparison understates the US ability to pro-
duce the Soviet output mix because it overstates the
dollar costs of advanced Soviet goods.
Coverage of Product Samples
and Comparison Categories
GNP in this paper has been divided into five end use
categories: consumption, investment, defense, admin-
istration, and other. The composition of each of these
major categories and their ratios will be briefly
examined in this section."
Z' For more detailed descriptions of the work that provides the
foundation for this paper, see
Consumption in the
US and USSR (JEC 1981); and USSR: Measures of Economic
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Consumption
Consumption includes all household expenditures on
goods and services plus government expenditures on
health and education. In the USSR the state is
responsible for practically all expenditures for educa-
tion, while in the United States households provide a
significant share. Consumption is divided into six
subcategories: food, soft goods, durables, household
services, health, and education.
The food estimate is based on a sample of prices for
108 items, such as milk, ground beef, white flour,
eggs, coffee, and carrots. Ruble prices primarily
represent weighted averages for food sold in Soviet
state retail stores and on collective farm markets.
Food produced and consumed on farms is also includ-
ed, valued at average prices received by farmers for
urban marketings. The dollar prices consist of compa-
rably weighted average prices, including sales tax, for
the same set of food items in the United States.
The price samples for soft goods (such as clothing)
and consumer durables (such as color television sets)
included 163 items. Retail established prices were
used and no attempt was made to account for black-
market sales, which are prevalent in the Soviet Union.
A considerable effort was made to account for quality
differences between Soviet and US goods, which
frequently resulted in a determination that the price
of the US good should be lowered
Comparisons of household services were made for 64
items covering housing, utilities, public transporta-
tion, personal communications, personal care, repair,
automobile services (gas, oil, and maintenance), rec-
reation, and miscellaneous services." PPPs for house-
hold services are based on national average prices for
individual services such as monthly telephone service
and charges for hotel rooms. Although in the USSR
most of these services are provided through public
organizations, prices of privately supplied services
have been included in the PPP ratios where appropri-
ate.
14 For the United States, miscellaneous services cover mainly finan-
cial services that have no counterpart in the USSR. The miscella-
neous category was converted using a PPP ratio based on that for
The weak link in the household services comparison is
housing. There is no Soviet counterpart to single-
family housing, which comprises the bulk of housing
in the United States. The PPP ratio for housing used
in this paper is the weighted sum of ratios for rental
costs per square meter and for maintenance. The PPP
ratio for housing is based on the price per square
meter of average-size urban apartments in the USSR
adjusted to exclude the large Soviet subsidies on
housing." The comparable US average rental rate is
derived from the relationship between US rents and
various housing characteristics presented in United
Nations-sponsored international comparisons. Ratios
for maintenance are based on prices of building
materials such as plywood, Portland cement, and
paint, along with an estimate of labor charges.
PPP ratios for health and education are based on
inputs-wages and current material purchases.26 No
tangible measure of output of these services exists
that can be priced in a comparison. The drawback of
the input method is that it ignores capital inputs and
implies that there is equal productivity in US and
Soviet health and education or that a correction can
be made for unequal productivity. The input method
also assumes equal quality of service. Most observers
agree that Soviet health and education are inferior
both in productivity and quality to their US counter-
parts, but there is no objective way to correct for these
differences. For these reasons, the health and educa-
tion comparisons probably are biased in the Soviets'
favor
" Housing subsidies have been excluded because they are nonpro-
ductive transactions. GNP attempts to capture only transactions
that contribute to current output. Including subsidies would thus
overstate annual outpu
" Charges for fixed capital services are excluded on both sides in
this category. In the United States the soaring costs of increasingly
sophisticated hospital equipment used for diagnosis and treatment
have been a major cause of the rise in health expenditures. Present
comparisons understate the US advantage in health care because
PPP ratios for medical equipment are almost certain to be higher
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Investment
Comparisons are made for gross fixed investment in
machinery and equipment (including capital repair)
and construction. Investment comparisons exclude
inventory change and net additions to livestock herds,
which are included in "other" expenditures.
PPP ratios for machinery and equipment are taken
from a study that compares US and Soviet machinery
prices for a sample of 245 items. For many years,
comprehensive data on prices and specifications for
Soviet machinery items were not available from Sovi-
et sources. Soviet publication during 1970-71 of a
large number of price handbooks (tsenniki) containing
prices for a wide spectrum of machinery and equip-
ment made a systematic comparison of US and Soviet
machinery possible. The classification system of the
Soviet input-output table was used to provide the
framework for the price sample. Products were select-
ed from the 21 sectors that define Soviet civilian
machinery production and matched under a contract
with a US manufacturer with comparable US prod-
ucts. The tsenniki ruble price and the dollar price
formed the item PPP ratio.
The PPP ratios for construction are based on a sample
of 277 types of projects representing a broad cross
section of construction. The individual ratios were
grouped into eight construction categories to mesh
with categories used in each country's published data
on construction expenditures. Construction ratios rely
on the USSR's 1972-73 capital census handbooks,
which provided simplified formulas for cost per square
meter of construction of various sizes and specifica-
tions. These ruble costs were adjusted upward by 20
percent to allow for Soviet cost overruns.
The quality of Soviet construction has often been
observed to be inferior to American. Although many
aspects of this inferiority relate only to appearance,
others reflect the Soviet attitude toward maintenance.
As an approach to handling the quality problems, we
arranged the comparisons so that the highest quality
Soviet construction for a given type of project was
matched with average and poor quality US construc-
tion. This procedure is arbitrary and does not entirely
eliminate the problem, although the correction moves
in the proper direction.
Capital repair expenditures are the sum of Soviet
spending on noncurrent repair of fixed assets. Unlike
current maintenance expenditures, capital repair ex-
penditures are not written off as current costs but are
capitalized. The book value of the asset is raised to
reflect this type of repair, which is supposed to extend
the service life of the asset.
Half of Soviet expenditures on capital repair have
been excluded in US-USSR comparisons of new fixed
investment. This compromise is adopted because re-
pair expenditures are rarely capitalized in the United
States for tax reasons, while in the USSR capital
repair is an accepted alternative to new investment
and represents an increment in the value of fixed
capital.
Soviet capital repair was allocated to machinery and
construction according to CIA estimates of its propor-
tional distribution. The machinery and construction
ratios were then adjusted to reflect its inclusion.
Defense, Administration, and Other Expenditures
Defense expenditures in both countries include expen-
ditures on military equipment, construction, personnel
(excluding transfer payments in the form of pensions),
operations, maintenance, military RDT&E, and de-
fense-related atomic energy programs. Except where
otherwise noted, defense will be defined according to
US conventions. This is done to make the comparison
of US and Soviet defense activities consistent, compa-
rable, and familiar to US policymakers. There is some
evidence that the Soviet definition of defense incorpo-
rated in Soviet statistics 27 is broader than the US
definition. The cost differences between the Soviet
"broad" and the US "narrow" definitions-mainly
costs of civilian US space programs that would be
funded by the Soviet military and civil defense activi-
ties-have been arbitrarily allocated to the Soviets'
"other" category. Appendix C gives a fuller discussion
of the reasons two different definitions of defense are
needed.
Z' Comprehensive official Soviet data on defense spending have
never been released. The official figure released annually obviously
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Table 2
Alternate Measures of US Defense
Spending in Selected Years
and state and local government employees not em-
ployed in education. Ruble wage data are the average
annual salaries of employees in Soviet administration
This study uses US defense expenditures and price
deflators from US GNP accounts for consistency with
other elements of US GNP. The figures in this paper
for US defense expenditures in 1976 prices differ
slightly from deflated defense expenditures derived
from the US budget and the Five-Year Defense
Program, which are used by the CIA in other studies
for comparisons of US and Soviet military activities.
Defense expenditures in US GNP accounts are the
sum of actual disbursements in a calendar year as
reported by the US Department of the Treasury. In
contrast, the defense series used by the CIA is derived
from annual outlays reported by DoD in the budget
and deflated by specially constructed deflator indexes.
Most of the small differences arise from differences
between the price deflators associated with the two
series. Both estimates of US defense spending are
shown in table 2.
For the USSR, administration is the sum of estimat-
ed expenditures on general agricultural programs, the
forest economy, state administrative bodies at all
levels, and municipal and related services (including
police). For the United States, this category is a
residual of current government spending on goods and
services not classified elsewhere. Some of the larger
categories of administration expenditures are central
administration and management, public safety, natu-
ral resources, and agriculture. The totals for the two
countries may not be entirely comparable, and Soviet
expenditures may be understated. The USSR is notor-
iously secretive about such matters as expenditures
for police and fire protection, for example.
PPP ratios for administration are based on inputs of
manpower and materials. Dollar wage data are based
on the average salary of federal civilian employees
categories listed above.
For the USSR, other expenditures include the differ-
ence between total GNP and the sum of consumption,
investment, defense, and administration as well as
several accounts that have been transferred from
other categories for compatibility purposes. Other
expenditures in Soviet GNP consist of net exports,
inventory change, civilian space, civilian research and
development, net change in livestock inventories, and
any statistical discrepancy. Livestock inventories and
civilian research and development funds have been
transferred to other expenditures from investment,
and civilian space has been transferred from defense.
For the United States, other expenditures include net
exports, inventory change, civilian space, foreign mili-
tary assistance, and any statistical discrepancy.
Because of the wide gulf separating the processes of
price determination in the United States and the
USSR, there are two general ways to view the
comparisons: as measures of relative production po-
tential and as measures of relative real income. The
first requires some major assumptions given the na- 25X1
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subject to strong qualification.
To measure production potential, prices in the two
countries in the base year should satisfy the theoreti-
cal conditions governing producer equilibrium: they
must be free to move so that relative prices can reflect
the marginal rates of substitution. For the United
States and especially for the USSR, the established
prices used in the comparisons involve distortions of
these conditions. In the USSR, indirect taxes, which
fall almost entirely (although unevenly) on consump-
tion, and an enormous bill for subsidies to agriculture
and other sectors ensure that relative factor costs will
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be quite different from relative established prices. At
the same time, investment goods are effectively ra-
tioned and distributed at prices that probably do not
fully recover production costs. Until detailed adjust-
ments of the established prices to factor costs can be
made, GNP comparisons will not provide good meas-
ures of relative production potential
The comparisons are more valid as measures of real
income differentials. To reach this interpretation, we
must assume, as in all such comparisons, that the
results do not depend on the distribution of income
within the countries, and that Soviet and American
tastes are the same.28 Once the proposition of common
tastes is accepted, the comparison of real incomes
requires that relative prices be proportional to the
relative marginal utilities of the goods and services as
judged by the representative consumer in each of the
two countries. Even for the United States, where
relatively free markets prevail, there are important
distortions from these conditions. In the Soviet Union
the prevalence of queues and black markets shows
that at state prices the Soviet consumer would like to
spend more than he or she is able to on some
commodities. Thus, relative prices are not proportion-
al to marginal utilities of goods and services over a
subsantial part of the Soviet market. Relative prices
apparently also play only a small role in Soviet
investment and defense decisions. But the assumption
that the population adjusts its purchases so as to
maximize its satisfaction with given incomes makes
sense for both countries
If the comparisons qualify as reasonable measures of
the relative size of real incomes in the USSR and the
United States, we believe they trace the upper bound
of the ratios of Soviet-to-US GNP. The GNP ratios
tend to overstate the Soviet relative position because:
? The PPP ratios for machinery, equipment, and
construction were not adjusted to account for US
quality advantages beyond those reflected in the
original product matches.
? The ratios of established prices in the two countries
ignore the substantial advantage that the American
consumer has in terms of convenience, variety, and
availability. These "services" are covered in the US
price but not in the Soviet counterpart. The dollar
value of Soviet output, therefore, is overstated and
the ruble value of US output is understated.
? The PPP ratios for services-especially health and
education-probably are too high because they do
not adjust adequately for the higher qualifications
of American workers in health and education.
On balance, then, Soviet economic performance prob-
ably compares somewhat less favorably with that of
the United States than our calculations suggest.
In the area of basic data quality, we have the most
confidence in the US- and Soviet-weighted investment
and consumption PPP ratios because of the extensive
research underlying them. The US-weighted defense
ratio (the one used to convert US defense from dollars
to rubles) has the least confidence because of the
difficult nature of pricing US weapons in rubles. We
therefore realize our estimates of US defense in rubles
are subject to considerable uncertainty. The uncer-
tainty in the US ruble defense estimate, however, has
a limited effect on the aggregate comparisons. The
US-weighted ruble-dollar defense ratio would have to
be in error by at least 50 percent to shift Soviet GNP
as a percentage of US GNP by as much as 1 to 2
percentage points, and we believe it is unlikely to be
off by this much. Errors in the US-weighted defense
ratio would have no effect on the aggregate compari-
sons in dollars, since they are determined by Soviet-
weighted ratios in which we have higher confidence.
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Appendix B
Differences Between Civilian
PPP Ratios and Military
Ruble-Dollar Ratios
The incorporation of defense into Soviet-US economic
comparisons requires combining defense comparisons
using the military ruble-dollar ratio methodology and
civilian comparisons using the PPP ratio methodology
into a coherent structure. Consequently, the differ-
ences between the two methodologies take on greater
significance than when civilian and military compari-
sons are estimated separately using their respective
methods. This appendix examines these differences
and addresses issues of compatibility.
The CIA's purpose in estimating dollar costs of
procuring and maintaining Soviet military equipment
is to determine what it would cost to manufacture and
maintain the Soviet design (exclusive of RDT&E
costs) in the United States using US manufacturing
technology and practices. We do this, when possible,
through detailed engineering studies.29 Where we do
not have enough information for an engineering study,
the dollar costs of Soviet weapons derived using the
military ruble-dollar ratio methodology often depend
on mathematical models called cost-estimating rela-
tionships (CERs). These calculate costs based on
performance parameters. For example, US aerospace
industries have found from experience that factors
like weight and speed are good predictors of aircraft
costs. A CER used to derive dollar costs for Soviet
aircraft, then, would be based on US manufacturing
and design experience but would have Soviet aircraft
performance characteristics as inputs. To avoid over-
stating the dollar cost of the Soviet item, a US CER
with a level of technology appropriate to that of the
Soviet system is selected. If no CER or direct infor-
mation is available, a US analogue that matches the
Soviet good as closely as possible is used as a last
resort. Because of the problems in matching, this
method is only used in a limited number of cases
The PPP ratio concept differs from the military ruble-
dollar ratio concept in that it estimates the cost of
producing the performance of the Soviet good using
US design as well as manufacturing technology and
practices. In other words, a US good is selected that
most closely matches the function and performance of
the Soviet good, and its dollar price is compared to the
ruble price of the Soviet good to form the individual
product PPP ratio.
Until recently, there have not been strong analytic
reasons to integrate the two methodological concepts;
they have been developed separately to address differ-
ent issues. Consistency, however, might argue for an
estimate constructed with the same methodology.
How different are the two types of ratios and what is
the effect on the GNP estimate of mixing the two
methodologies?
In theoretical terms, there should be no difference
between military ruble-dollar ratios and military PPP
ratios. The cost of a US analogue to a Soviet good
should be the same as the cost to build the Soviet good
in the United States provided that the analogue is a
perfect match in all performance parameters. For
example, a military ruble-dollar ratio for the MIG-21
aircraft would be formed by obtaining the Soviet
ruble price of the aircraft and the dollar cost of
building it in the United States. A military PPP ratio
for the same MIG-21 aircraft would be constructed
by comparing the dollar price of a US plane that met
the specified key performance criteria, such as pounds
of thrust and airspeed, with the MIG-21's ruble price.
Assume, for example, that the American F-4 met the
specified criteria.
The military PPP ratio and the military ruble-dollar
ratio for the MIG-21 would be identical if the dollar
cost of the F-4 were identical to the dollar cost of
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producing the MIG-21 in the United States. In
reality, however, the two ratios probably would not be
equal, because it is very difficult to find perfect US
analogues. Selected parameters may be matched, but
US military goods tend to be produced with expensive
"state-of-the-art" technology that improves their per-
formance in other areas relative to the Soviet good.
The dollar cost of the US analogue would thus be
higher than the dollar cost of the Soviet good derived
from the military ruble-dollar ratio methodology,
making the military PPP ratio lower than the military
ruble-dollar ratio. This relationship may not be true in
every case, but is probably true in the preponderance
of cases because of the US lead in many key techno-
logical areas.
The differences between PPP ratios for military goods
and services and actual military ruble-dollar ratios
suggest that the use of the latter probably affects the
GNP comparisons somewhat, but the effects are
difficult to quantify.30 Use of military ruble-dollar
ratios in a GNP study primarily based on PPP ratios
probably understates the size of the Soviet defense
effort in dollars and overstates the size of the US
defense effort in rubles relative to what would have
been estimated had PPP ratios been used for military
goods and services. This is the opposite direction of
the bias introduced into Soviet-US comparisons by
the index number effect. The Soviet comparative
J0 Empirical efforts to estimate these differences based on a limited
sample, in fact, contradict the hypothesis that military ruble-dollar
ratios should be higher than PPP ratios for the military, because the
two types of ratios are fairly consistent for some goods. Certain
durable goods, such as transport aircraft, tractors, trucks, construc-
tion equipment, electronics, and transport ships, are common to
both the civilian and military samples of goods and services used in
our defense and GNP comparisons. The PPP ratios and the military
ruble-dollar ratios for these goods were derived independently, but
the civilian PPP ratios may be viewed as "military" PPP ratios
because they relate to goods in the military sample. When com-
pared, the military ruble-dollar ratios of these goods fall within a
comfortable range of the corresponding civilian (conjectural mili-
tary PPP) ratios. When the means of the ratios in each category are
ranked, the same pattern is found in both sets: the more technologi-
cally complex the category, the higher its mean ratio. This indicates
that it is relatively more difficult (measured in terms of cost) for the
Soviet Union to build complex goods than it is for the United
States. This evidence is suggestive of a general trend but not
conclusive because the number of items common to both sets of
ratios and their impact on either the comparative GNP estimate or
the estimate of comparative dollar costs of defense activities is
small. Also, most of these goods are not as technologically complex
as some military systems, and the practical differences between the
disadvantage in producing complex goods, reflected in
high military ruble-dollar item ratios, is being accen-
tuated as the Soviet weapon mix begins to include
more of such weapons. These complex goods, however,
would have somewhat lower ratios if the PPP concept
were used for the military, which would result in a
larger estimate of the Soviet defense effort in dollars
and a smaller estimate of the US defense effort in
rubles. Thus, the use of military ruble-dollar ratios
tends to offset somewhat the uncertainty in the
Soviet-US comparisons that comes from the index
number problem in economic measurement.
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Appendix C
Measuring Comparative US and
Soviet Defense Burdens
Defense burden is conventionally expressed as the
ratio of the value of military goods and services
produced to the total value of goods and services
produced by an economy when both defense and GNP
are measured in indigenous currency terms. The
burden ratio answers significant questions about a
country's resource commitment to its military, but
these answers differ depending upon the definition of
defense used.'
When we compare US and Soviet defense activities,
we usually use a US definition of defense because it is
more familiar to US policymakers. This definition
includes:
? National security programs in both countries that in
the United States would be funded by the Depart-
ment of Defense.
? Defense-related nuclear programs in both countries
that in the United States would be funded by the
Department of Energy.
? US Selective Service activities and their Soviet
counterparts.
? The defense-related activities of the Soviet Border
Guards and the US Coast Guard.
Soviet defense costs measured by this definition ex-
ceeded US costs by a considerable margin in 1981-
by 25 percent in ruble terms and by 45 percent in
dollars
A comparison could, of course, also be made using a
Soviet definition of defense. We believe a Soviet
definition would be broader than the US definition
Table 3
Costs of US and Soviet Defense
Activities in 1981
USSR United USSR/ USSR United USSR/
States US States US
66 52 a 1.25 138 b 97 1.45
a US defense costs in rubles show what it would cost using
prevailing prices and wages and assuming the necessary production
technology for the Soviets to procure the same new weapons and
man a force of the same size and with the same weapons inventory
as that of the United States and to operate that force as we do.
b Soviet costs in dollars give the US cost to procure, man, and
operate the Soviet force as the Soviets do.
because a greater range of activities are associated
with the defense function in the USSR. The Soviet
definition would probably add the following costs to
the narrow US definition:
? Space activities that in the United States would be
funded by the National Aeronautics and Space
Administration.
? Civil defense.
? Soviet Internal Security, Railroad, and Construc-
tion Troops.
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insights into the resource constraints confronting So- 25X1
viet military planners as well as the priorities they
assign to different elements of their defense effort.
The estimate based on this broader definition provides
an indication of the level and trend in the annual
Soviet resource commitment to its military forces. It
allows us to assess the full impact of defense on the
Soviet economy and, conversely, the impact of eco-
nomic factors on Soviet defense activities. The broad
ruble defense estimate also provides somewhat better
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Table 4
Ratios of Defense Costs to GNP for the
USSR and the United States, 1981
Narrow Broad Narrow Broad
Definition Definition Definition Definition
Narrow and broad definitions of defense, along with
comparative GNP data, allow us to compute a num-
ber of different measures of defense in relation to
national output. When comparing burden ratios for
different countries a common definition of defense
should be adopted so as not to distort the meaning of
comparative differences. When one particular coun-
try's perception of its defense burden is of interest,
however, that country's own definition of defense or
an approximation of it should be used.
Regardless of the definition of defense activities used,
any burden analysis should be calculated in indige-
nous currencies. Price and quantity relationships vary
from country to country, and measuring burdens in
indigenous currencies preserves the domestic price
and quantity relationships that would be distorted if
foreign prices were used.
Table 4 shows the estimated burden ratios based on
both the narrow and broad definitions of defense. Of
the eight ratios that can be calculated, only those
based on dollars for the United states and rubles for
the Soviet Union embody all of the necessary pricing
conditions to serve as burden measures. If the Soviet
burden of defense were being compared to the Ameri-
can, it would be over two and a half times as great
(12.9 percent of Soviet GNP versus 4.9 percent of US
GNP using the US definition of defense activities).
The burden of defense in each country, however,
would be 13.9 percent of Soviet GNP and 4.9 percent
of US GNP, where each figure is based on a defini-
tion of activities most consistent with national circum-
stances
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Appendix D
Comparisons of Real Soviet and US GNPs: Tables
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Appendix D
Comparisons of Real Soviet and US GNPs: Tables
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Appendix D
Comparisons of Real Soviet and US GNPs: Tables
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