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In a recent critique of this paper by Dr Andrew Leigh and Dr Chris Ryan, Dr David Zyngier has
suggested that a time series on education expenditure that is constructed by Leigh and Ryan is
wrong. One of Zyngier's reasons for making this claim is his belief that Leigh and Ryan (2008) did
not adjust for inflation. While it is true that Leigh and Ryan did not adjust the education
expenditure data in Appendix Table 2 of their paper to account for inflation, they did not claim to
do so. Indeed, the title of that table is "Nominal education expenditure (Spending per child per
year, in current dollars)". Zyngier appears to have confused nominal data with real data.
Specifically, he has interpreted "current dollars" to mean "constant 2003-2004 dollars". I suspect
that this confusion may have been caused by a lack of familiarity with the terminology of economic
statistics on the part of Zyngier. While Leigh and Ryan (2008) are correct to use the term "current
dollars" to refer to nominal data, it is not difficult to see why someone who is unfamilar with the
terminology employed in economic statistics might misinterpret this to mean "constant prices for
this year" or maybe "constant prices for the most recent year in the data set". Such a mistake is
understandable. After all, the everyday meaning of "current" is "now", not each of many previous
points in time. Nonetheless, while such a mistake is understandable, it still renders this aspect of
Zyngier's criticism of Leigh and Ryan (2008) invalid.

In economic statistics, current dollar figures refer to nominal values. These are valued in terms of
the dollars of the year in which the expenditure took place. On the other hand, constant dollar
figures refer to real values. These are valued in terms of particular year·s dollars. I suspect that
misinterpreting "current dollars" to mean "constant dollars of the most recent year in the time
series" is probably an easy and understandable mistake to make for people who are not familiar
with the terminology employed in economic statistics.

The distinction between nominal (or current price) data and real (or constant price) data exists
because time series data on pure quantities is sometimes unavailable in circumstances where time
series data on expenditure and time series data on prices is available. In these circumstances, it is
possible to obtain an index that represents the implicit time series data on quantities by:

1. Constructing an expenditure index from the nominal expenditure time series;

2. Constructing a price index from the price time series; and

3. Deflating (that is, dividing) the nominal expenditure index by the price index.

4. Renormalising the resulting quantity index so that it has a base year.

The result of this is an index of the underlying quantities. If the time series of nominal expenditure
itself is deflated by the price index, then the resulting data will be a time series of real
expenditure. This is simply actual expenditure valued at the prices that prevailed in whatever year
is chosen as the base year.

When it comes to actual data, things are, of course, much more complicated. In particular, it is
necessary to deal with both aggregation and quality changes when constructing the underlying price
index. There are also other techniques for constructing volume (or quantity) indices, including the
use of chain weights. There is a large literature on the properties of various different types of
indices. An overview of this literature can be found at this website for a course on index
numbers that is taught by Professor Erwin Diewert at the University of British Columbia in Canada.
Note 1. The full reference for Leigh and Ryan (2008) is: Leigh, A and C Ryan (2008), "How has school
productivity changed in Australia?", mimeo The Australian National University, Canberra.

Note 2. Dr Zyngier's criticisms of Leigh and Ryan (2008) appear in three places. The first place they
appear is in this article in the online version of the Australian's Higher Education Supplement from
Wednesday 19 March 2008. The second place they appear is in a letter to the editor of the online
version of the Age from Tuesday 1 April 2008. However, it should be noted that this letter does not
explicitly mention the current doolar versus constant dollar issue. The third place in which it
appears is in this comment on this post at Dr Leigh's blog site. Andrew addresses a different aspect
of Dr Zyngier's critiques in the post mentioned above.

Note 3. While Leigh and Ryan (2008) privide a time series of nominal education expenditure in their
Appendix Table 2, they also provide three alternative time series of real education expenditures in
their Appendix Table 4. The real data is presumably based on the nominal expenditure data in their
Appendix Table 2 and three alterenative price indices that are provided in their Appendix Table 3.

Update: I have made some edits to this post, including the addition of point four in the section of
the post that discusses the construction of a quantity index from a time series on nominal
expenditures and a time series on prices.