PPs Unesa

CAPITAL AND COST OF EDUCATION

PHILOSOPHY EDUCATION
Dr. Waspodo Tjipto Subroto
DEPARTMENT OF ECONOMICS EDUCATION
FACULTY OF ECONOMICS
UNIVERSITAS NEGERI SURABAYA

Chapter
1
Eight
1
PPs Unesa Human capital is an intangible asset!

•Human capital definitions

– Wide: Productive capacity of individuals
– More narrow: Productive capacity related to knowledge and skills
•Improvements in labour quality may take many forms
– Healthcare
– Learning in families and neigbourhoods
– Formal schooling
– On-the-job training
•Empirical studies typically focus on formal education
– But stock figures include social capital as well?

Chapter
2
Eight
2
PPs Unesa Human capital is an intangible asset!

•Education is regarded as an investment

•Investment entails costs – direct costs and opportunity costs
of forgone earnings
•To be willing to undertake the investments, individuals must
be compensated with higher wages ex post
•For employers to be willing to pay higher wages, individuals
with higher education must have higher productivity
Individuals make optimal choices based on net present value
of investment – in income or utility terms

Chapter
3
Eight
3
PPs Unesa Approaches to human capital estimation

•Direct volume measures in NA

– Volume indicators for types of education weighted together by unit
costs
•The National Wealth Approach
– Implies a ”wide” definition of human capital
•The Jorgenson-Fraumeni approach to measuring output of the
education sector (the Australian and the US papers)
– More ”narrow”: Analysing the contribution to national wealth from
education
•The ”indicator approach” (the Italian paper)
– Human capital as a multidimensional phenomenon
– A broad set of human capital-related indicators (OECD: ”Education at
a Glance”)
Chapter
4
Eight
4
PPs Unesa

The National Wealth Approach: Calculating

human capital residually
Three steps:
1.Calculate resource rents from all natural resources
(renewable and non-renewable)
2.Decompose Net National Income (NNI) into the returns from
the inputs i.e. physical capital, natural resources etc. Human
capital is calculated as the residual
3.Capitalize the income stream from the human capital
component

Chapter
5
Eight
5
PPs Unesa Estimates of National Wealth - a Norwegian
example

Financial wealth
50000
Value human capital
45000 Value physical capital
Value Oil and gas
40000 Value renewable resources

35000

30000
Billion NOK

25000

20000

15000

10000

5000

0
1985

1986

1987

1988

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006
1989

-5000
Year
Chapter
6
Eight
6
PPs Unesa

The NW Approach: Strengths and weaknesses

• Making the “intangible” • The methods are not (necessarily)

comparable to other forward looking
(measurable) assets – In particular: demographic trends
• Based on (mostly) are not taken into account
existing national account • The human capital estimate is a
figures residual!
• Based on rather simple • There is (usually) no attempt to
methods and calculations isolate the contribution to human
capital from education

Chapter
7
Eight
7
PPs Unesa

The Jorgenson-Fraumeni Approach

•Based on human capital theory
•Output of the education sector in a year is the increment in
human capital stock of the population, i.e. the increase in
productive capacity over the lifetime
•The distribution of individual productivity is measured by the
corresponding wage differentials
•Relies upon the assumption that market wages reflect the
productivity gains attributable to education
•The measure does not capture possible externalities from
investments in education

Chapter
8
Eight
8
PPs Unesa Human capital measuring:
What should be the role and ambitions of NSOs?

Three possible strategies:

1.Developing databases on human capital for research and
analyses
2.Developing methods for output measures in the Government
sector (NA)
3.Full integration of capital measures in the National Accounts

Chapter
9
Eight
9
PPs Unesa

COST ANALYSIS IN EDUCATION

Classification of Costs of Education:

Costs can be classified into two types:

•Individual or private costs
•Institutional or public or social costs

Chapter
10
Eight
10
PPs Unesa

Individual Costs or Private Cost

•Individual costs or private costs of education

are those costs of education incurred by a
learner or by his/her parents/guardians or by
the family as a whole.
•Individual costs are of two types:
Direct
Indirect.

Chapter
11
Eight
11
PPs Unesa

Direct of Costs

•These are those costs that are directly visible. They include
all money expenditure incurred on different
•items by the student. For example, expenditure on tuition
fees, other fees and charges, purchase of books, stationary,
uniforms, hostel expenses and transport.

Chapter
12
Eight
12
PPs Unesa

Indirect of Costs

•Indirect costs are those costs which are not directly visible.
These costs are sometimes called ‘opportunity costs or
foregone earnings’. Opportunity costs refer to the value of
students’ time or earning forgone to continue the study.

Chapter
13
Eight
13
PPs Unesa

Institutional Costs of Education or Public Costs of

Education
•Costs incurred at the institutional level (government, private
or mixed) are called institutional costs or public costs of
education. Public costs are those that include financing by the
government on the basis of taxes, loans and other public
revenues. The institutional costs of education are, generally,
analyzed using the following variables.
•Variable and fixed costs of education.
•Recurring and non-recurring costs of education.
•Current and capital costs of education.

Chapter
14
Eight
14
PPs Unesa

Type of Costs Education

•Total Cost
•Total Fixed costs and Total Variable Costs
•Current Costs and Capital Costs
•Opportunity Costs or Foregone Earnings
•Social or Total Costs of Education
•Unit Costs of Education

Chapter
16
Eight
16
PPs Unesa Total of Cost
Classification of Costs of Education

Chapter
17
Eight
17
PPs Unesa

Total Fixed costs and Total Variable Costs

•Fixed costs are defined as those that do not change with a

change in the number of learners, e.g., costs on
•institution’s building. In other
•words, the costs that do not increase or decrease with the
changes in the level of activity of the institution are known as
the fixed costs.

Chapter
18
Eight
18
PPs Unesa

Variable of Costs Education

•Vary with every change in number of learners. e.g., costs on teachers,
laboratory materials and stationary items.
•Sometimes we also use terms like short run fixed costs and long run fixed
costs. For example, the cost of buildings forms long run fixed costs and the
cost on teacher salaries is referred to as short run fixed costs.

The fixed costs include the costs of the following items:

•purchase and construction of land and buildings;
•purchase of furniture ;
•purchase of durable equipment; etc.
•costs on other non-recurring items.
Chapter
19
Eight
19
PPs Unesa

Current Costs and Capital Costs

•Most of the time, capital costs and current costs are

synonymously used with fixed costs and variable costs
respectively. Current costs are incurred on consumable items
within a given financial year. Capital costs refer to costs
incurred on durable items like land, buildings, equipment and
so on that rendered useful service over a period of years.

Chapter
20
Eight
20
PPs Unesa

Opportunity Costs or Foregone Earnings

•The concept of opportunity cost emphasizes the factor of

choice. Because the resources are scarce, we are forced to
choose. If we choose to have more of one thing, we shall have
to accept less of another thing. This type of cost plays a very
important role in decision-making. By the opportunity cost of
decision is meant the sacrifice of alternatives required by that
decision. If there are no sacrifices, there is no cost.

Chapter
21
Eight
21
PPs Unesa

Total social costs of education

•The sum of individual costs and

institutional costs is called the total social
costs of education.

Chapter
22
Eight
22
PPs Unesa

Unit Costs of Education

•Unit costs of education means costs per unit i.e. per
student, per graduate, per credit, etc. Generally, unit
in unit costs means the total number of learners
enrolled in a course in a particular year. unit costs
refer to the unit of output i.e. successful learner or
graduate. This is called effective costs of education.

Chapter
23
Eight
23
PPs Unesa

Average costs of education

•The average cost is the same as the unit costs or cost per student. The
AC is derived by dividing the total cost by the number of units
(enrolments).
•AC = TC/N

•Where,
•AC= average costs,
•N = number of students enrolled.

Chapter
24
Eight
24
PPs Unesa

Marginal costs of education

•Marginal cost refers to the cost incurred on an additional learner or the
additional cost attributable to an extra learner. We can express it
symbolically as:
•MCn = TCn – TCn-1

•Where,
•MC = marginal cost,
•n = enrolments in a year,
•n-1 = enrolment in previous year

Chapter
25
Eight
25
PPs Unesa

It is also called an incremental cost. It may be

emphasized that in cost analysis in education,
total cost and average cost are used extensively.
On the other hand, the use of marginal cost in
education is limited.

Chapter
26
Eight
26
PPs Unesa

Cost Benefit and Cost Effectiveness Analysis

•Cost-benefit analysis and cost effectiveness analysis can help us in
evaluating the alternative uses of resources. The estimation of a unit cost
is necessary, if one has to make a cost-benefit or cost-effectiveness
analysis. In a cost-benefit analysis, the output is measured in monetary
terms, and in cost-effectiveness analysis, the output is addressed in terms
of the level of achievement of the objectives. Cost benefit analysis is also
known as “rate of return” analysis.

Chapter
27
Eight
27
PPs Unesa

Thank you

Email: waspodosubroto@unesa.ac.id
waspodotjipto@yahoo.co.id
tjiptosubroto@gmail.com
Chapter
28
Eight
28