Expenditure on education in Purchasing Power Standards: A comparison of three alternative deflators

Abstract

Following the conclusions of the IEG Indicator Expert Group on Education Expenditure the main recommended indicator to compare expenditure on education across countries is based on the expenditure per capita (students in full time equivalent –FTE) and corrected using purchasing power parities (PPP) as convertor unit. The election of PPP is based on its two main characteristics: a) it is a currency convertor able to transform different currencies to a common currency; and b) it is a spatial price deflator, that is, it equalizes purchasing power eliminating differences in price levels. However, different approaches could be used to calculate PPP in order to standardized expenditure values (Eurostat-OECD, 2012): PPP in GDP, PPP in actual individual consumption (AIC) and PPP in actual individual consumption of education (AICE). This report focueses on a) the comparison of the basket elements of goods and services of the three deflators, b) the analysis of the evolution of education expenditures per student in purchasing power standards (PPS) across Member States (MS) at different levels; and c) the assessment of the quality adjustment factor included in the PPP Education based on PISA scores. Results suggests that the selection of the deflator matters when purchasing power parities are used in international expenditure comparison. In particular, while PPP in GDP is the traditional deflator used, PPP in AIC provides a better measure of economic activity for comparisons of material well-being of household. However the application of PPP Education needs additional investigation because its application significantly changes the expenditure distribution picture of EU MS. On the other hand, the inclusion or exclusion of the quality-adjustment (measure through PISA scores) to calculate PPP Education does not change the relative position of the EU MS in the expenditure distribution, but it is a recommended approximation to control for the different qualities of education outputs.