**ANNEX 2: Adjustment of Data Set for Inflation and Exchange rate changes** Since this data set was available in AMADEUS only in USD million (in current USD) we had to adjust for fluctuations of inflation rate and nominal exchange rate. A serious problem with this data set, is the fact that all the data are expressed in current dollar prices. Such an approximation of real values by the use of dollar values can only be useful for countries with a stable exchange rate with respect to the dollar and an inflation rate close to the US inflation rate. When the exchange rate fluctuations are large and inflation rate is high and variable, variables, such as investment and first difference in sales will represent not only quantity but also valuation effects. We will show that valuation effects are substantial for the Bulgarian case so these should be eliminated.

Large fluctuations in the nomninal exchange rate (EXR) imply that if data are measured in current USD prices, the changes in variables (investment) will pick up not only quantity changes but valuation changes as well. One way to exclude the valuation changes was to convert the data to be measured in constant dollar prices. We calculated the constant dollar values for each variable, X as follows: X- (EXR.,i / EXR, ) where t is 1993 and i is year 0, 1, 2 (see the third and fourth columns of Table A. 1). The constant dollar value approach is sufficient if PPP holds. The real exchange rate, however, varyied substantially during the period 1993 - 1996. The significant real appreciation during 1994 and 1995 distorts the data set even when expressed in constant dollars, because the assets value in dollars would be lower than when expressed in domestic currency. To correct for this problem, we corrected the constant dollar values for changes in relative prices (IE), as follows: X **t -** (EXR t / EXR t ) / IE t+ where t is 1993 and i is year 0, 1, 2. After that we compute net investment and first difference of sales and then we average all the variables over the period 1993 - 1995 (see the first two columns of Table A2. 1). Table A 2.1. illustrates clearly the importance of correcting for real exchange rate fluctuations. This is especially true for the investment series. In current dollar prices both mean and median investmant are negative, while this is no longer the case once investment is expressed in real dollar prices.

**Table A2.1 Bulgarian Company Data, AMADEUS, USD million**

||_Real Dollar Prices_|_Con_|_stant Dollar Pri_|_ces_<br>_Curr_|_ent Dollar Prices_||
|---|---|---|---|---|---|---|
||MEAN<br>MED|IAN<br>ME|AN<br>ME|DIAN<br>ME|AN<br>ME|DIAN|
|NEMPL|709|286|709|286|709|286|
|K|14.51|2.41|12.42|2.07|7.896|1.33|
|I|3.88|0.35|1.34|-0.03|-2.409|-0.52|
|IB|4.67|0.53|2.01|0.09|-1.999|-0.438|
|LTDEBT|1.62|0.00|1.42|0.00|0.911|0.000|
|CLIAB|7.92|1.06|6.54|0.88|3.751|0.517|
|LOAN|5.25|0.65|4.34|0.56|2.494|0.337|
|CREDIT|1.96|0.15|1.61|0.13|0.917|0.073|
|DSAL|8.44|1.42|8.45|1.41|0.999|0.075|
|IPAY|0.88|0.09|0.75|0.08|0.461|0.053|
|CF|0.15|0.07|0.11|0.05|0.022|0.027|

**Variables description: NEMPL** - number of employees, K - tangible assets, **I=d(K)** is the net investment, **IB** - gross fixed investment including depreciation, **LTDEBT** is the long term debt, **NCLLAB** - noncurrent liabilities, **CLIAB** - current liabilities, **LOAN** - short term loans, **CREDIT** - trade credit, d(SAL) proxies future profits, **IPAY** - interest paid, **CF** - cash flow.

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