Abstract

The costs of shortages and rationing are not captured by standard consumer price indices. In this study, the authors use the virtual prices for the rationed goods to calculate a new cost-of-living index (CLI). The results for Poland show that from 1987 to 1992 the CLI that ignores the rationing effects is biased upward from 3.6 to 6.99 percentage points per year. Compared to the welfare loss calculated by neglecting the rationing effects in the prereform period, the welfare loss that reflects the rationing is only 25 percent as large using external virtual prices, and only 15 percent as large using Hausman virtual prices.