The costs of shortages and rationing are not captured by standard consumer price indices. Thus the change in real gross domestic product (GDP) per capita is an overestimate of welfare losses in transition economies. In this study virtual prices are used to calculate new cost-of-living indices, making it possible to construct more accurate pre- and postreform welfare comparisons. The results for Poland using virtual prices show a 62 to 84 percent decline in welfare over the transition period 1987 to 1992. This welfare loss is approximately one-third the value obtained using actual prices.


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