Government provides services to households either individually or collectively. Individual services are the services that government provides to specific identifiable households. Collective services are the services that government provides simultaneously to all members of the community. Housing, health, recreation and culture, education and social protection are individual services, while general public services, defense, public order and safety, economic affairs, environment protection, and housing and community amenities are collective services.
Collective services are produced by government, but individual services can be either produced by government or purchased by government from market producers. The individual services that government purchases from market producers are called market services because they are sold at economically-significant prices. The collective and individual services that government produces itself are called non-market services because they are supplied free or sold at prices that are not economically significant.
Because market services are sold at economically-significant prices, the outputs of their producers can be valued by multiplying the quantities produced by the prices at which they are sold. These prices are also the prices with which to calculate PPPs for market services. However, without economically-significant prices, it is not possible to value the outputs of non-market producers in the same way. National accountants value the outputs of non-market producers by summing their production costs. To maintain consistency with the prices underlying these values, it is necessary to use the prices of inputs to calculate the PPPs for non-market services.
Collecting the economically-significant prices paid for market services is not as straight forward as it is for most consumer services. Purchases of individual services from market producers by government are financed differently from country to country. The government may buy the services, in full or in part, direct from the producers or it may reimburse households, either in full or in part, after the households themselves have made the purchase. When both government and households pay the market producer, there are two purchasers and two prices.
The prices to be collected are total prices. In countries where either government or households pay the whole purchasers’ price direct to the market producer, the total price is the price that either government or households pay (irrespective of any subsequent reimbursement in the case of households). In countries where households pay only a portion of the purchasers’ price to the market producer and the reminder is paid to the market producer by government, the total price is the composite price – that is, the sum of the non-reimbursable part paid by households and the part paid by government.
Health and education services are the principal market services purchased by government. Although it is possible to collect total prices for these services in principle, it is difficult to collect internationally comparable total prices in practice. For ICP comparisons, total prices are only collected for medical goods and services delivered to out-patients. Output prices are not collected for hospital services, nor are they collected for education services; reference PPPs (see below) are used instead.
Calculating the PPPs for non-market services with the prices of inputs is called the input-price approach. It requires a breakdown of the expenditure on non-market services by cost components: compensation of employees, intermediate consumption, consumption of fixed capital, net taxes on production, and receipts from sales which is negative. ICP comparisons only apply the input-price approach for the three most important services produced by government: health, education and collective services. Reference PPPs (see below) are used for the remaining services government produced services.
Reference PPPs are PPPs that are use for basic headings for which no prices have been collected. They are based on prices collected for other basic headings. Reference PPPs serve as proxies for the PPPs that would have been calculated had prices been collected for the basic headings for which no prices were collected.