Q1. WHAT IS ECONOMICS OF EDUCATION? WHY ECONOMICS OF EDUCATION?

AFTER ALL, IS IT IMPORTANT FOR DEVELOPING COUNTRIES LIKE ETHIOPIA?

WHY? DO YOU THINK THE ETHIOPIAN EDUCATION SYSTEM IS USING IT? IF YES
WHEN, HOW AND FOR WHAT LEVEL AND PURPOSES

1.1 MEANING OF ECONOMICS OF EDUCATION

Economic system is the structure of production, allocation of economic inputs, distribution of
economic outputs, and consumption of goods and services in an economy. Economics of
Education is the application of Economic principles, concepts, and laws to the process of
Education. Economics of education studies human behavior (in terms of human decisions),
action(s) and reaction(s)) about schooling (Babalola, 2003). It is the study of how educational
managers make official or approved choices from scarce available resources which is meant for
the realization of the best possible educational outcomes.

The process of development in a country is determined by a harmonious functioning of economy

and education. The economy and education are tools for the development of the people provided
they are utilized to the maximum. This means both of them relate positively.

There is a very close relationship between education and the economic system. Whatever the
system of government the aim of education, curriculum and methods of teaching are determined
keeping in mind the welfare of the society at large and these factors are decided by market
forces, i.e. by demand and supply. The reason for economics of education is then production of
education where resources such as capital invested in buildings or technology and teachers labor
are scarce according to the analysis of economists. Because of scarcity of resources policy
makers need to decide on what to produce (how much to spend on each stage of educ.), how to
produce education (provision of educ. Services in a way to maximize its benefits to society), and
for whom is education provided (who should have access to each stage of educ.).

Both the educational issues and financial constraints should be considered as the study of the
allocation of resources among educational institutions and activities and of the returns obtained.

1.2 IMPORTANCE OF THE SUBJECT MATTER

As economics deals with planning, financing and appropriate utilization of resources and
education (basic) is the fundamental right to citizens, it becomes very essential to equate the
available resources with provision of education. Because of this very reason economics of
education is the agenda of the day (timely issue). It is with this understanding that:
1. Cost of education increases. The proportion of national income spent on education has
increased in recent years.
2. Education investment increases: As individuals become richer the proportion of their
income devoted to health, education etc. rises.
3. Technological Transformation. The basis of the technological transformation of the
world economy can be found in the accumulation of knowledge.
4. Health and productivity improved: The low productivity of many workers in various
countries is directly attributable to their poor physical state. This in turn depends to a
considerable extent on the type of education that the workers receive.
5. Skills Improved. It is a common belief that a shortage of skills holds back economic
growth. An effective education plan must be based on the needs of skilled manpower of a
country. An unplanned system of education results in unemployed persons and deprives
of their contributions to the growth of national income. Thus the specialized role of
manpower forecasting brings the economics of education into prominence.
6. Demand of Scarce Resources: The under developed countries are short of physical and
sometimes of natural resources. This implies that the use of abundant supply of
manpower and its endowment with skills is likely to be one of the major objectives of any
programme, planning, financing through the understanding of economics of education.

1.3 THE IMPORTANCE OF ECONOMICS OF EDUCATION IN DEVELOPING

COUNTRIES
The developing countries like ours need economics of education more than developed nations for
reasons of being poor where the extent of scarcity is much bigger.

Education in the developing countries is most prominently poorly administered, lack planning
and coordination. It is characterized by high monetary cost. For the most efficient mobilization
of the country’s resources, it is paramount importance to consider the plans for the development
of their economy and human resources development coordination.

The issue of education is beyond the general plan. The neglect of education means overlooking
the importance of an adequate supply of skilled manpower and the efficient uses of resources in
education. John Vaize (n.d) observes: “since education makes large demands on public funds
about 20% of government expenditure in recently developed countries it is an important part of
economic programme, because of its cost alone. But it has also an important positive
contribution to make to economic growth.”

The need and nature of economics of education in the developing countries involves the
following issues:
1. Despite the provision of free primary education Villagers do not send their children to
primary schools. Failure of compulsory primary education programme is largely due to
the lack of proper responses from the people. This is because they know that opportunity
cost is higher.
2. The dropout rate of children of poor farmers is found to be higher. And this is For high
opportunity cost of education
3. High opportunity cost of education is one of the factors preventing participation and
causing discrimination in education opportunities. Since the various concessions and
benefits of increasing education expenditure have been accruing (make provision) to the
richer than to the poorer people and since richer people are politically more influential,
larger expenditures on education are made on higher education. Education expenditure is
a more definite and a subtler (delicate) form of benefiting a particular group in the
society, without causing any open resentment (bitterness) to others. The expenditure of
education in urban areas has been rising than in rural areas.
4. Employment and larger earnings from education is the main reason for greater rush of
students to professional colleges.
5. Since general school education is prerequisite for admission in to colleges there is
overcrowding in general schools than in technical schools in developing countries
including Ethiopia.
 1.4 THE ETHIOPIAN GOVERNMENT IS USING ECONOMICS OF EDUCATION
The concept of economics of education is properly using the scarce resource to educational
activities and formation of human capital. Ethiopia is considering the importance of education to
the economic, social and political development and hence addressing the needs to education is
considered in its education and training policy of 1994. In the policy general education has been
given priority as its social rate of return is high and it is prerequisite to other levels.

CONCLUSION
Economics of education generally deals with the following issues:
 Identification and measurement of economic value of education
 Allocation of resources in education. Process of production of educational output from
sets of inputs
 Educational finance: Focused on analysis of resources of finance for education
 Educational planning: to ensure optimal use of resources because education is not a privet
good and is not subject to the full rigor of market computation
 Teacher’s salaries: teacher’s salaries are particular concern for instructions.
 Process by which education is produced and Distribution of education among computing
groups and individuals.

Q2. DESCRIBE AND EXPLAIN THE THEORETICAL DEVELOPMENT OF ECONOMICS OF

EDUCATION? LINK THOSE DEVELOPMENT EPISODES WITH THE ORIGIN AND
DEVELOPMENT OF ECONOMICS OF EDUCATION

By 1950s, economists gave attention to issues such as the relationship between education and economic
growth; relationship between education and income distribution and also the financing of education.

According to www.skope.ox.ac.uk Economists’ focus on two areas, the first is for its own sake –
consumption good and for its delayed earning benefits – an investment good. Both connected by theory
of utility maximisation where all economic choices produce benefits and costs and it is rational to
choose something providing the benefits outweigh the costs. The benefits of education are about
enjoyment of learning and social life while the cost of education is price of courses, effort of studying
and opportunity costs.
Human Capital Theory
The basic principle of the human capital theory that stresses the role of education as a
productivity enhancing investment (Becker 1964) is widely accepted. Education is seen almost as
a universal cure to some of the most severe economic problems such as unemployment and
poverty. Human capital is also regarded as key factor in generating higher productivity and
economic growth (Barro and Sala-i-Martin, 1995).

The modern analysis of the economics of education had its birth with Theodore Schultz’s address
to the American Economic Association in December 1960. According to Schultz Education can
be regarded as an investment in human capital, an investment that is analogous to investments in
physical capital. Individuals decide to invest in their own education, at the margin, just as firms
decide to invest in new machinery; the investment in each case entails current costs, and yields
future benefits; and an internal rate of return to the investment can in each case be calculated.

Psacharopoulos and Patrinos, (2004) outline the basics of the human capital model, emphasizing
the role that education has to play in raising individuals’ productivity. They also provide
empirical estimates of the rate of return to education in a variety of countries. Since the early
1970s, economists have also considered another family of models that aims to explain the
relationship between education and earnings.

Adam Smith (1776), in Theodore R. Breton (2012) identified “the acquired and useful abilities of
all the inhabitants or members of the society,” what is now called “human capital,” as one of the
four types of fixed capital that contribute to production in a national economy. But subsequently
factories replaced skilled artisans as the principal means of production, economists concentrated
on the role of physical capital in development, and they forgot about human capital. In the 1920s
Cobb and Douglas (1928), in Theodore R. Breton (2012) observed that economic growth in the
U.S. could be explained by the growth in physical capital and labor and a productivity trend..
After World War II the International Bank for Reconstruction and Development (IBRD) was
created to finance physical capital projects in countries damaged by the war and in poor
countries. At the time economists believed that countries were poor because they lacked physical
capital. The IBRD proceeded to provide financing for physical capital projects, but many of
these projects were unsuccessful. Some economists began to wonder if poor countries might be
poor because they lacked human capital. Schultz (1961) observed that rich countries devastated
in World War II were able to quickly employ massive amounts of new physical capital, while the
poorest countries seemed unable to successfully utilize even small amounts. He theorized that a
nation’s capability to productively use physical capital is a function of its level of human capital
and that if human capital does not increase along with physical capital, then economic
development cannot proceed. Shultz further observed that human capital is more likely to be the
constraint to development because foreign investors are eager to invest in physical capital,
but not in human capital.

Education is a means to the formation of human capital and human capital as mentioned above is
a reason for development of physical capital. Economic development is possible and becomes
faster with developed human capital of the nations. As a result investing on education means
planning to bring about economic growth and development and this in turn leads to prosperity of
the people and the nation.

Q3. DESCRIBE AND EXPLAIN THE SCOPE OF ECONOMICS OF EDUCATION BY RELATING TO

THE CONTEXT OF ETHIOPIA?

The study of economics of education includes private and social rates of returns to education,
human capital and signaling theories of education, non-pecuniary (non financial) benefits of
education, education and economic development, contribution of education to the economy,
measuring educational expenditure, manpower planning, educational planning and human
resource development, educational cost, cost analysis, educational production, educational
effectiveness and efficiency, costs-efficiency and cost effectiveness, cost-benefit analysis and
economics of teacher supply, education and equity.

The Countries having higher levels of income or economically advanced also have higher level
of educational attainment. The economically poor countries are likely to remain educationally
weak performing.

Education in Ethiopia has private rates of returns as it enables individuals for a better position
and social status and social rate of return since it has cumulative effect on the productivity and
has contribution to the national economy. Like the other countries education has effect on human
capital and economic development. It also helps for manpower planning, educational planning
and human resource development and educational cost analysis of the country.

Q4. WHAT IS THE ESSENCE OF PPF/PPC? DESCRIBE AND EXPLAIN ITS THEORETICAL
CONCEPTS FROM THE PERSPECTIVE OF OPPORTUNITY COST, EFFICIENCY,
MEASURABILITY AS WELL AS ITS APPLICABILITY BY GIVING PRACTICAL EXAMPLES?

Production Possibility Curve (PPC) Model

Before defining and analyzing the model it is better to look at some concepts related to and
standing points of PPC/F (production possibility curve or frontier). The production possibilities
curve (PPC) separates attainable combinations of goods from those that are unattainable. Thus,
scarcity is shown by the existence of some unattainable bundles of goods. By scarcity we mean
simply an excess of wants over the resources available. Because of scarcity, societies must
somehow choose on how resources are to be allocated; thus a particular point on the PPC must
be chosen.

The essence of PPF/C is to graphically represent all possible combinations of two goods which
an economy can produce with available technology and with efficient use of its given resources.
The downward slope in the curve indicates that few units of a commodity are sacrificed for the
other units and the concave shaped curve is because more and more units of one commodity are
sacrificed to gain the other commodity. In the PPC model any point inside the PPC indicates that
there is unemployment or inefficiency in resource utilization, any point outside of the PPC curve
is impossible or unattainable as all the resources are already been fully utilized whereas all
points on the PPC curve shows efficient resource utilization and maximum level output. In the
PPC model due to growth of resources and improvement in technology the production possibility
curve shifts to the right and this indicates that there is more production.

Assumptions of production economic model

1. The available resources in the economy are fixed and can be shifted from one use to the other
2. With the help of the available resources only two goods or sets of goods can be produced
3. All the available resources in the economy are fully and efficiently utilized.
MEASURABILITY OF EDUCATION
Measurability is an issue of productivity and efficiency of firm and an economy that uses inputs
such as labour and capital to produce goods and services. An increase in productivity can mean
that more goods and services have been produced with the same amount of capital and labour, or
that the same amount of goods and services has been produced with less capital and labour.

Measurement indicators could be input, access, output and outcome.

Input indicators measure the means or the resources employed to facilitate the satisfaction of
needs and, hence, reaching development objectives. Examples in education would include the
number of teachers, school buildings, and teaching materials supplies and the cost and level of
expenditures (public and private) on education. Since absolute numbers may not be very
indicative for policy decisions, input indicators are often specified as some match of supply and
demand variables, such as pupil/teacher ratios and average cost per pupil.

Access indicators identify demand factors of potential users and would comprise variables that
determine the use and accessibility of the supplied services. Examples of this type of indicators
in education are the geographical distance to school facilities, family and cultural background of
students, foregone earnings of individuals and households, and direct private costs of education
(fees, utensils, uniforms, etc.). Some of these demand factors are essential in textbook analyses
of the economics of education, but rarely are given due importance in educational information
systems, let alone in the practical application of monitoring and evaluating educational programs.

Output and outcome indicators measure the impact of a particular set of policies or a project on
living standards of the population. Improvement in these types of indicators should determine the
success of policies and projects as they try to measure the development impact. Output and
outcomes should relate to objectives. The immediate objective of educational policies may be to
raise coverage of the educational system (as measured through enrollment rates), improve its
internal efficiency (retention rates) and/or raise the skills and knowledge of graduates (which can
be me assured through achievement tests). Output indicators measure the extent of achievements
of immediate objectives. Better education may serve broader development goals, such as higher
labor productivity, better health and enhanced capabilities of individuals to participate in modern
society. Such `higher' goals could be referred to as outcomes beyond the immediate influence of
educational policies and programs and in economics are referred to as `externalities'. It may not
always be easy to capture "outcomes" through quantitative indicators, but usually proxies can be
found. Labor productivity may be a more straightforward measurable concept, but it may be
difficult to identify how much of productivity increases can be assigned to better education (Rob
Vos, 1996)

Jamison and Lau (1982), summarizing more than thirty studies of the relationship between
agricultural output and education around the world, estimated that each additional year of
education achieved by the head of an agricultural household increases its annual agricultural
output, holding the agricultural inputs constant.

As it is described in human capital theory investment in human capital leads to higher

productivity of individuals which in turn leads to higher earnings (Schultz, 1971; Cohn, 1979).

OPPORTUNITY COSTS IN EDUCATION

Opportunity cost incorporates the notion of scarcity: No matter what we do, there is always
trade-off. We must trade off one thing for another because resources are limited and can be used
in different ways. By acquiring something, we use up resources that could have been used to
acquire something else. The notion of opportunity cost allows measuring this trade-off.

- Is the benefit you lose by choosing one alternative over another one?
- If you choose one alternative over another, then the cost of choosing that
alternative is an opportunity cost.
- Is a cost of alternatives forgone?
Opportunity cost has negative relation with enrollment rate in education. When the
opportunity cost increases the enrollment rate decreases. In all the courses of education
planning and implementations opportunity cost should be given due attention.

EFFICIENCY IN EDUCATION
One of the main pressures on education managers is to improve the efficiency of the education
system in which they work. Their efforts encounter two problems. First, many front-line
education administrators do not really understand efficiency or how it can be improved. Second,
many administrators do not have the authority to make the changes that would be needed to
seriously improve efficiency.
What is Education Efficiency?
In its simplest terms, efficiency means achieving the desired goals of education at lower cost, or
achieving more of those goals without increasing costs. But in reality it is not that simple.
Efficiency is commonly confused with lower cost. It is a mistake to believe that a lower-cost
activity is necessarily more efficient. Similarly, it is a mistake to believe that just lowering the
cost of education improves efficiency without considering the quality of the activity. Sometimes
lower cost leads to higher efficiency, but not always. Where there are excessive expenditures
and waste, greater efficiency and lower costs can happen at the same time. However, where
more costly inputs lead to proportionately greater productivity, efficiency may involve higher
costs. The key point is that the efficiency of an activity can only be determined by considering
the quality of the output, not just the cost of the input.

The implication to education management is that if the move toward greater efficiency is to
mean anything more than crude cost slashing (with its concomitant threat to quality),
administrators need to operate from a clear understanding of (i) Which inputs and processes of
instructional delivery contribute to greater student learning, and (ii) which inputs and
instructional processes can be reduced without serious drops in student learning (D. Chapman,
2002).

Generally PPC/F shows alternative ways to use scarce resources efficiently and effectively.

Q5. EDUCATION IS BOTH AN INVESTMENT AND CONSUMPTION THAT CAN BE

CHARACTERIZED AS GIANT INDUSTRY HAVING ANALOGY WITH A PRODUCTION
MODEL). DO YOU AGREE WITH THIS STATEMENT? JUSTIFY YOUR ANSWER/S
BRIEFLY. DO NOT FORGET TO CRITICALLY EXAMINE THE ANALOGY BETWEEN THE
PRODUCTION MODEL AND THE EDUCATION FUNCTION

Education as Consumption and Investment

Governments choose to spend money on education for many different reasons; of these the two
are Consumption and Investment. Consumption expenditure which is incurred now for the
benefits it will provide in the present and investment expenditure which is incurred now for the
benefits it will provide in the future. Another way of putting it is to say that the resources
devoted to consumption are, literally, consumed in the present, but that of investment is a way of
increasing productive capacity, or wealth, in the future. Education is regarded as both
consumption and investment good. Parents want their children to learn to read because they will
enjoy life more as a result (consumption benefits of education). Education is also a form of
investment in human capital. Future levels of production are dependent on labor, physical capital
and technical knowledge and the skills of the labor force which are provided by education. The
activities of an educated person such as enjoying non-pecuniary (non-monetary) benefits like
reading stories and poems, enjoying higher social status, etc. are activities of consumption and
the monetary gains from a lifetime's earnings are taken as investment.

Education is said to be consumption when it is acquired for the sake of pleasure. Investment
however asks the question how much does education contributes to economic growth compared
with other forms of investment? This is the concern of economics of education.

Education as an Industry
Education presumably produces educated individuals who are expected to have enhanced
productivity. Thus, the process by which education transforms (relatively) unproductive
individuals into (relatively) productive ones is not to be understood. In other words, it is essential
to understand the educational production function.

Considering education as an industry also involves the issue of standards and provides a reason
to evaluate educational performance. Education is termed as an industry as it produces
economically productive individuals, it requires human and non-human resources for carrying
out this human production function and in today’s context, market forces play an important role
in the demand and supply of education.

6. Education augments productivity, trainability, segmentations, as well as competitions in a society. Do

you agree with this statement? Justify your response/s by referring to economic theories and educational
development.

6.1Education augments productivity

According to human capital theory which is developed in the 1960, Education and training both
contribute to production. Therefore it’s an investment. And it can be undertaken with apurpose of
increasing personal income.

Therefore according to this theory , Though there’s a critics which says the association
between higher levels of schooling with increased earning does not demonstrate that skills
acquired in the schooling produces the income which in turn ,is the sign of productivity, the
theory states more schooling leads to higher productivity and economic growth.

The higher productivity of well-educated workers is one of the factors that explain higher
GDPs and, therefore, higher incomes in developed countries
(source:educationeconomica ,Wikipideahttps://en.wikipedia.org/wiki/Education_economics)

Education is thought to raise productivity through the provision of skills and knowledge, which
increase the efficiency and hence the value of the more educated. According to neoclassical
economic theory, wages are determined on the basis of a worker‘s marginal contribution to a
firm‘s revenues. Given that earnings reflect differences in marginal productivity, the additional
earnings of the educated can serve as a measure of their contribution to output. Thus, the extra
earnings of the educated are a reflection of their higher productivity. There for it’s possible to
say education augments productivity.

Robert Solow’s pioneering work on economic growth in the 1950s led to the formulation of
growth accounting and the discovery (or uncovering) of the “residual.”3 Solow (1957), working
with data from 1909 to 1949, demonstrated that the residual was 87.5 percent of total growth in
per capita terms. The residual is that portion of economic growth that the researcher cannot
explain by the increase in physical productive factors such as the capital stock, the number of
workers and their hours and weeks of work.

6.2 Education augments trainability

According to the postulate of THE JOB COMPETITION MODEL, education gives

background information concerning the trainability of individuals It means, Educated
individuals are more educable and trainable than un educated one . As Education is the
process of training and developing knowledge, skill, mind and character of individuals, it
 makes them more capable and at the same time, doesn’t mean that they are educant. still
need training.

6.3. Education augments segmentation source: The economics and financing of

education, (October 2008, page 59 )

The dual labour market hypothesis or the segmentation hypothesis thinks that the connection
between education and income is not related to worker productivity per use, but rather to some
key characteristics that determine who are admitted to the primary labour market from those who
are not so fortunate. The result again, is some kind of screening process, but the implications
differ. In the screening hypothesis, education and income are related albeit not because of
changes in productivity but rather due to the use by employers of educational credentials as a
selection device. In the segmentation hypothesis the very relationship between education and
income is questioned, since such relationship does not hold for persons admitted only to
secondary labour markets.

It was to be clear that the labour market is segmented into primary and secondary labour markets
according this theory. The primary labour market consist of individuals who are admitted to
training slots and job ladders holding promise of economic and job mobility. The secondary
market consist of workers who are hired on temporary basis, for which ladder type positions no
matter what their stock of education and training happens to be. Some writers have argued that
there is no hard empirical evidence to support the labour market segmentation.

6.4 Education Expands Competitions in the society source :The economics and financing of
education ,(October 2008,page 60 )

The radical Marxist approach sees education as means by which the dominant social class
perpetuates the status quo from generation to generation. The main explanatory factor of income
inequality according to this approach is family background or social class. By providing
schooling to its offspring, the income earning power and economic dominance of that class will
be sustained.
Here education is viewed as a vehicle through which the wealth of the upper class is transmitted
from generation to generation. Anderson (1987) research has demonstrated that education helps
many children of modest social origins to reach the highest occupational classes and income
groups. These benefits may be economic in nature and accrue in the form of additional earnings.
Education plays a significant role in income distribution and is considered a great leveler.

The job competition model postulates that education provides background information on the
trainability of individual levels of education and is positively correlated. Thurow (1975) suggest
that wages are determined by job characteristics and not by individual productivity. Employers
seek to employ the best available candidates for their vacancies at the lowest training cost. They
use education qualifications as indicators of trainability. Job seekers are ranged in an imaginary
labor queue according to their expected training cost and employers match this queue of
applicants to a queue of vacant jobs that are classified on the basis of their level. The best
positions go to the individuals with the lowest training cost (highest qualification and education
is regarded as a positional good).

In short, we have observed that education augments productivity, trainability, segmentation as

well as competition in the society notwithstanding the different criticisms leveled against it. All
along, education which involves the development of main factors of production- human
development will continue to be the major enabler in production and development.

7. Education creates earning differential and this is true even in Ethiopia. Do you agree with this
statement? Justify and explain it. source : The economics and financing of education ,(October
2008, page -58)
Earning is closely related to education due to the fact that educated workers earn higher wages or
salaries than those who are illiterate or unskilled or have lower educational qualifications. Equalization
of educational opportunities helps the poor and deprived sections of society to improve the levels of
their educational standards, skill and training, thereby increasing the prospects of employability and
higher earnings.
Individuals are willing to take more years of schooling partly because they can earn more and get better
jobs, on average, with more schooling. For many, more schooling can also be a source of social
mobility. Similarly, nation-states and regions are interested in raising the average level of schooling in
their population, in part, because they think that doing so will improve productivity, raise the quality of
jobs in the economy, and increase economic growth. (source :Investement in education pdf)

Education is the most determinant of individuals’ economic and social success. The study conducted by
different writers Caswell (1917), dodge (1904) ,Gorseline(1932) concluded that the most schooling
classes had significantly higher incomes than the other group. This shows education has such a strong
bearing on individual and society earning. when we bring the issue to the Ethiopia ,except in some
cases,it is also true that mostly,educated people are living a better life than the uneducated.Regions
with high education service coverage are developed more than those with low education coverage
exaples are .(Afar, Ethiosomale,Gambela and BeniShangul).But in some exceptional cases,in our
country ,there’re a number of individuals who without education changed their lives and become reach.
This shows education in Ethiopia, not always has such a strong influence on individual earning.

8. What is the essence of 'economic of scale' in education?

Economies of scale: is a cost advantage that arises with increased output of a product. Economies
of scale arise because of inverse relationship between quantity produced and per unit fixed cost.
i.e the greater the quantity of good produced the lower the per unit fixed cost, because these cost
are shared over a larger number of goods. Economies of scale may also reduce variable costs per
unit because of operational efficiency and synergies.

9. Describe and explain the difference between educational expenditure and educational costs.M.
A. EDUCATION PART – IIGROUP APAPER 2ECONOMICS OF EDUCATION,page 17-18)

There is a tendency to use the terms expenditure and cost interchangeably. However, the terms
‘expenditure on education’ and ‘cost of education’ are not the same.
Cost of education refers to the amount of money spent to acquire or impart education. On the other
hand, information on expenditure on education is more easily accessible and available from budgets and
accounts of the Institution at the micro level and the Central and State governments at the macro level.
From the point of view of the individuals, costs refer to the amount of money spent during a particular
period (generally a year) to acquire education.
From the point of view of the state or the institution, it refers to the expenditure incurred on education
during a year. The term cost and expenditure are used interchangeably, but more popularly, we use the
term 'cost' and refer to cost per student pertaining to a particular level (primary, secondary, higher
secondary or university).
Similarly, cost per student to the institution/state for a particular course or level is calculated. But cost
per student in the institution/state may include expenditure incurred on staff salaries, equipment and
buildings, maintenance costs of apparatus, library books, sports, etc.
From the point of view of the individual, cost of acquiring education includes expenditure on books and
stationery, school fees, travel cost and in case of students making use of hostels, it will also include rent
of hostel accommodation, mess charges, etc,
Expenditure: it’s the amount of money paid for education. this kind of payments are measurable,can be
recorded systematically and can be audited.
Cost:- the concept of cost comes into play in the production of goods or services. It needs to be noted
that: (a) cost may be expressed in terms of money or in nonmonetary terms; (b) cost affects a specific
economic transactor, producer, seller, buyer, consumer, etc. Thus, when the owner of a factor of
production offers that factor to a producer, the cost to the owner is represented by his ‘consumption
forgone’, while the producer incurs a precise and measurable money cost, made up of wages, interest,
charges, etc.
In business, cost is usually a monetary valuation of (1) effort, (2) material, (3) resources, (4) time and
utilities consumed, (5) risks incurred and (6) opportunity forgone in production and delivery of a good
or service. All expenses are costs, but not all costs (such as those incurred in acquisition of an income-
generating asset) are expenses.
Cost of Education: Something of value, usually an amount of money, given up in exchange for
something else, usually goods or services. The education sector, as the producer of the service of
‘education’ and like any other sector of activity, theoretically brings into play the same concepts of cost.
A closer look at the application of the concept of cost to education, however, reveals three types of
difficulty inherent in the very nature of the activity of education, and arising more particularly out of: (a)
the definition of the production of education; (b) the identification of the economic transactors
concerned with education; (c) the fact that education has the character of a public service.
By analogy with other sectors of activity, it is accepted that the activity of education consists of
producing a service which can be explicitly defined by reference to the aims of the education system.
For instance, one product of education may be the preservation and enlargement of the sum of human
knowledge; another product is measured by the creation and development of a civilization; yet another is
measurable by the expansion of the reserves of human resources. For the sake of simplicity, we shall
limit ourselves to the view that the production of education consists of either transmitting or ensuring the
assimilation of, a body of knowledge, certain ways of behavior, etc.’ In the first case, the output of
education is measured mainly by the number of enrolments and in the second by the number of
successes, or scholastic performance. The two different definitions imply two different measurements of
the quantity of education produced by the same system. In contrast to what happens in every transaction
relating to goods or services, the quantity of education supplied by the producer is not equal to the
quantity acquired by the consumer. In estimating total or unit costs, therefore, it is necessary to specify
clearly whether the reference is to producer cost or consumer costs; though even this assumes that a
distinction can be drawn between the producer and the consumer of education. The producers may be :
the education establishment, the teacher, the public authority (ministry of education) a private agency (in
the case of private education) families (who help to bring up children at home), or any other non-formal
teaching institution. The consumers are the pupils and students and also families, which are, in a sense,
‘buyers’ of education for their children. One could thus speak of: (a) the cost to the agencies producing
education, essentially education establishments and administrative or supervisory authorities; (b) the
cost to the consumers of education, essentiallyfamilies
10. Describe and explain the major types of educational costs. Do not forget to explain their
behaviour.
source:( M. A. EDUCATION PART – IIGROUP APAPER 2ECONOMICS OF EDUCATION,page 19-
22))
Costs can be classified in different ways

1. Individual/ Private Costs and Institutional/ Public/ Social Costs.

2. Direct Costs and Indirect Costs
3. The Opportunity 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. These concern individuals in families and
represent costs which the individuals and the families must bear in return for the education received.

Individual costs are of two types: direct and indirect. examples of individual or private direct costs are
as follows : tuition and examination fees and transport, uniform ,stationery food ,house rent etc.
examples of individual or private in direct costs are the opportunity cost individual forgone ,when
families send their daughters to school,the house hold activities that would not be covered is opportunity
cost.

Social Costs :These costs concern society/govt and refer to such costs (or expenditure) as are borne out
as a result of all education and training activities in a society at a given point of time. Costs incurred at
the institutional level government are called institutional /social costs of education and include
financing by the government on the basis of taxes, loans and other public revenues.

Social costs are also of two types: direct and indirect.

Social direct Costs are those costs that are directly visible. They include teacherssalary,text book
provision for students, construction of school and all instructional and other programme materials
printed, fuel, oil and repairs of vehicles used for home-to-school transportation, centralised data
processing services, in-house equipment repairs, field trips, expenditure on tuition fees, other fees .

Social Indirect Costs are earnings forgone.

The table shows the direct and indirect costs as follows

Social costs Private costs

Teachers' salaries
Fees
• Other current expenditure value• of Books
scholarships on goods and services • Travel
etc. cost
Direct Costs • Expenditure on books, etc.
• Imputed rent

IndirectCosts Earnings foregone Earnings foregone

Opportunity Cost: Opportunity cost is a concept you did not see in the definition of economics. But not
seeing it doesn’t mean that it isn’t there. There is yet more to say about the definition, but this is the
logical place to introduce a related concept. Opportunity costs are everywhere, due to scarcity and the
necessity of choosing. Opportunity cost is not what you choose when you make a choice -it is what you
did not choose in making a choice. Opportunity cost is the value of the forgone alternative - what you
gave up when you got something. The opportunity cost of going to college is the money you would have
earned if you worked instead. On the one hand, you lose four years of salary while getting your degree;
on the other hand, you hope to earn more during your career, due to your education, to offset the lost
wages. Thus, opportunity cost is the cost of alternatives foregone.

11. Explain the essence of opportunity costs in education. Show how the concept of opportunity
cost functions in the context of Ethiopia.

What happens in an economy is the outcome of thousands of individual and social decisions. People
and government must decide how to divide their income/budget among all the goods and services
available in the marketplace. Especially , education sector should decide whether to construct schools,
whether to train teachers and how much to allocate to which activity.

Nearly all decisions involve trade-offs/exchange. A key concept that recurs in analyzing the decision-
making process is the notion of opportunity cost. The full “cost” of making a specific choice includes
what we give up by not making the alternative choice. The best alternative that we forgo, or give up,
when we make a choice or a decision is called the opportunity cost of that decision

The opportunity cost of constructing a new school is the value of the other things we could have done
with the same money .

Opportunity cost is a concept we did not see in the definition of economics of education. But not seeing
it doesn’t mean that it isn’t there. There is yet more to say about the definition, but this is the logical
place to introduce a related concept. Opportunity costs are everywhere, due to scarcity and the necessity
of choosing. Opportunity cost is not what you choose when you make a choice -it is what you did not
choose in making a choice. Opportunity cost is the value of the forgone alternative - what you gave up
when you got something.

The opportunity cost of going to college is the money the learner would have earned if he/she worked
instead. On the one hand, students lose four years of salary while getting their degree; on the other
hand, they hope to earn more during their career, due to their education, to offset the lost wages. Thus,
opportunity cost is the cost of alternatives foregone

In the context of Ethiopian , There ‘s one simple example. The working age is from 15-49.on the other
hand ,the school age for secondary school is from 15-18. it’s expected that there are more than 2000
secondary school students who take away their labor from market by choosing to continue their
education.

This represents a loose of current output for the economy as a whole as well as loose of earnings for the
students is an opportunity cost. On the other hand , Ethiopian government pays monthly salary for
more than 400,000 teachers in the country .It’s a huge budget and a huge decision. The value of other
infrastructures that could have been done are the opportunity cost of education service expansion.

12. Education may create equality, inequality, or both. Do you agree with this statement? Justify
and explain it. Do not forget to relate your analysis with the context of Ethiopia.

Education can create equality, inequality or both. In Ethiopia context, education creates equality
for all citizens to learn regardless of age, race and gender. But at the same time it creates income
inequality. For example, a person who has MA degree and a person who has PHD on the same
field do not have equal income.

a. Education Creates Equality

When we say education creates equality we mean that everyone should have the same
opportunities in life. No one should be discriminated against because of social background,
gender, religion, or age. But the real world seldom lives up to those ideals.

Education creates equality between people in the society. One of the goal of ‘Education for all’
program which is accessing universal primary education equally for all school aged children
regardless of their ethnicity, religion, gender and economic status.

In the context of Ethiopia, different types of documents (plans) prepared for the achievement of
this goal. ESDPs (I, II, III, and IV, V) has been prepared to give emphasis on accessibility,
equality and equity in education between regions, genders and rural and urban areas. Anybody
whether from rural or urban, poor or rich family, boy or girl has an equal chance of joining
schools unless there is scarce resource of inputs.

b. Education Creates Inequality

Education also creates inequality between individuals and societies in income distribution. Those
who have high educational status earn more income than those who have low educational status.
We can take one practical example in one Ethiopian school. Let assume that two teachers of the
same field (physics education) have a degree and a diploma. If we assign both of them as a
primary physics teacher of grade seven, both of them can fit for the position and do the same job
(preparing lesson plan, teaching, managing students and soon). But the one who has degree gets
more salary than the one who has diploma because of the difference in their educational level.
So, education creates inequality in income distribution even if both of them are exerting the same
effort for the job.

c. Education Creates Earning Differential

Education plays a central role in modern labor markets. Hundreds of studies in many different
countries and time periods have confirmed that better-educated individuals earn higher
wages, experience less unemployment, and work in more prestigious occupations than their
less-educated counterparts. Despite the overwhelming evidence of a positive correlation
between education and labor market status, social scientists have been cautious to draw strong
inferences about the causal effect of schooling. In the absence of experimental evidence, it
is very difficult to know whether the higher earnings observed for better-educated workers
are caused by their higher education, or whether individuals with greater earning capacity
have chosen to acquire more schooling.

13. Education and the labour market have dual relationship. Do you agree with this statement?
Justify and explain it.

Education is a process of training and developing knowledge, skill, mind and character. It is
necessary to provide competent work force for the labor market. Let us see the importance of
education for the labor market.

Labor market is defined as the buying and selling of labor service. It can be understood as a
market with a demand side and supply side. The determinants of education determine the labor
market outcome.
When you educate people, they develop knowledge and problem solving skill. Education
particularly higher education produces skillful labor force for labor market. If the education
sector does not give emphasis for the quality of education, less skillful manpower will be
produced. The output may affect the labor market. So education has strong impact on the labor
market.

On the other hand, labor market has positive and negative effect on education. If someone wants
to invest on education, he/she needs different inputs (teachers, text book…) for this investment.
One of the inputs for schooling is teaching laborers (teachers). If schools can get qualified
teachers, they will produce proper output. If schools cannot get qualified and competent laborers
(teachers) from the labor market, the investment will not produce the expected outputs. So it will
be affected negatively.

From these two explanations we can conclude that education and labor market have dual
relationship.

14. Describe and explain the major approaches to planning in education. Relate its theoretical
aspects with the real context of Ethiopia

Educational planning is concerned with the problems of how to make the best use of limited
resources allocated to education in view of the priorities given to different stages of education or
different sector of education and the need of the economy.

There are three rival approaches to educational planning. The three rival approaches are:

1. The social demand approach

2. The manpower requirement approach and
3. The cost benefit analysis
1. The Social Demand Approach: This approach requires the education authorities to provide
schools and find facilities for all students who demand admission and who are qualified to
enter. This approach has advantages and disadvantages.

Advantages of the Social Demand Approach

 i. The approach provides the planners with approximate number of places where educational
facilities has to be provided.
ii. It is a suitable political tool to meet the need to satisfy the demands of the general public.
iii. Where resources are acutely limited, and where we are seeking to provide those kinds and
quantities of education which will offer the greatest good to the greatest number such
planning techniques are best.

Limitations of the Approach

i. The approach has no control over factors such as the price of education.
ii. The approach has no control over absorptive capacity of the economy for the trained
personnel.
iii. The approach does not in any way lay claim to whether the resources expended are
economically allotted and to that extent, the approach is poor.
iv. The approach does not provide guidance we need as to how best to meet the identified
needs.
2. The Manpower Requirement Approach: the focus of this approach is to forecast the
manpower needs of the economy. That is, it stresses output from the educational system to
meet the man-power needs at some future date.

The approach focuses on three main elements, namely:

i. Specification of the composition of manpower need at some future date.

ii. Specification of man power availabilities.
iii. Specification which reconciles the former specification with the later.

Like social demand approach, this approach also has certain advantages and disadvantages.

Advantages of Man-Power Approach

i. Man-power could usefully call attention to extreme gaps and imbalances in the education
out-put pattern that need remedy.
 ii. It gives educators useful guidance on how roughly educational qualifications of the labour
force ought to be developed in the future.
iii. The unemployment and underemployment which may result from some over- emphasis on
man-power approach may become a challenge to move towards the right kind of education
which may be development-oriented, and thereby creating its own job.

Weaknesses of the Approach

i. It gives educational planner a limited guidance in the sense that it does not tell what can be
actually achieved in every level of education e.g. primary education, secondary education,
etc.
ii. The approach says nothing about primary education, which is not considered to be work
connected. By implication, manpower approach suggests the curbing of the expansion of
primary education until the nation is rich enough to expand it.
iii. The employment classifications and manpower ratios such as desirable ratio and the
assumed education qualifications corresponding to each category of job borrowed ideas
from industrialized countries or economy. This does not fit into the realities of less
developed countries of Africa.
iv. It is impossible to make reliable fore-cast of manpower requirements far enough ahead of
time because of many economic, technological and other uncertainties which are involved.
3. The Cost Benefit Analysis Approach: looks at each level of education as investment in
human beings with the purpose that the returns will help to improve the whole economy.

Education is perceived by the approach from two angles, namely:

i. The social rates of return and

ii. Private rates of return
I. The Social Rates of Return: stresses the benefit to be derived by the state of investing in a
particular form of education.
II. The Private Rates of Return: is the investment by private individual and the expected benefits
for acquiring a particular type of education.

The approach has got advantages and limitations.

Advantages of Cost-Benefits Analysis Approach

1. By looking at the age earnings structure of the educated person, it is possible to measure
or quantify the increase in productivity of an educated person.
2. The analysis can show or suggest the directions in which education systems in a society
should expand so as to maximize the earning capacity of their products.

Limitation of the approach

1. In African states, it is a wrong assumption to say that salaries reflect productivity.

2. It is difficult to measure the benefits, which derives from investing in any type of
education.
3. In developing countries, differentials in earnings of workers cannot be attributed to
additional education acquired but to other things such as habits, customers, family
background, and primordial factor etc.
4. Primary education gives the highest return to society.
5. The salaries of civil servants are more influences by economic variables than by
productivity considerations.
6. A financial return from education has been inflated in African by past scarcity of people
with particular type and level of education.
15. Review the concept of cost benefit analysis in education and justify its practical applicability in
the context of Ethiopia

Cost benefit analysis is a technique that has been used for the purpose of choosing a program /a
project/ from among a number of programs /projects/ based on cost benefit affiliation. In
applying this technique, it is crucial to carefully consider the concept of costs, benefits and their
measurement. Fundamentally, cost benefit analysis provides a measure of the profitability of
education as an investment for society, or for the individual or his or her family.

Cost benefit analysis refers to a systematic comparison of the magnitude of the costs incurred
and the benefits gained from certain educational investment in order to assess its economic
profitability. Above all, it relates educational costs with the benefits measured in monetary terms.
In general, cost benefit analysis relies on questions which revolve around the relationship
between the costs and benefits of education. Cost benefit analysis is used to assess the
profitability of investment in education.

Cost benefit analysis is founded on the following assumptions: the scarcity of economic
resources, the possibility of using these scare resources for alternative purposes, the intention of
decision makers to use scarce resources more rationally and finally recognizing the measurability
of costs and benefits. It is highly imperative to lighten the optimum use of available resources
and to allow the expenditure on education meet the criteria of cost effectiveness.

Educational cost-benefit analysis is currently, and has been for some years, a widely accepted
technique, used to assess the profitability of investment in education.

Woodhall:

"To sum up, a new approach to cost-benefit analysis is already in evidence in many
developing countries, which are changing traditional patterns of financing higher
education in the light of evidence of high private rates of return and are switching
emphasis to primary education, just as cost-benefit analysis recommended.

a. Benefits of Education

Investment in human capital awards individuals, enterprises and the society in various ways.
These awards or benefits could be more of economic in nature which accrue in the form of
earnings (incremental in nature), productivity or economic growth.

There are two types of benefits.

1. Direct benefits
2. Indirect benefits

1. Direct benefits can be measured

a. Social benefits – is the whole of the earning differential before income tax.
b. Private benefits -is the gain in earnings for the rest of a person’s working life.
 -post tax earning differential (after income tax).

2. Indirect benefits cannot be measured easily.

 Better health
 Reducing fertility rate
 Reducing crime

b. Cost of Education

There are two types of costs of education. These are:

1. Direct costs
2. Indirect costs

1. Direct costs - Is costs that can be measured directly.

a. Social costs - the total resource cost of education to the economy.

b. Private costs –the total costs borne by the student or his/her family.
- It includes any fees or direct costs that the individual pays plus the
opportunity costs in terms of forgone income.

2. Indirect cost - costs that cannot be measured easily.

Opportunity cost - is the earning forgone.

c. Application of Cost Benefit Analysis in Developing Country

In both developed and developing countries, cost-benefit analyses have been carried out taking
into account all the above limitations and making appropriate adjustments for them. In fact,
 returns from investments in primary education have been calculated and compared with returns
from investments in higher education for sixteen developing countries, and it was found that in
all of them the primary education sector turned out to be more profitable than the sector of higher
education (Harbison and Myers, 1964).
Even though cost-benefit analysis may not always provide the planner with definite policy
guidelines, it does provide him/her with information which is useful for making rational policy
decisions.
d. Application of Cost Benefit Analysis on a Project Component: Ethiopia
The World Bank’s Ethiopia Education Sector Development Program (ESDP) is note worthy for
its complexity. The ESDP is an expenditure program to restructure and expand Ethiopia's
educational system, aims to improve overall educational attainment while achieving greater
social equity. Its longer-term objective is to achieve universal basic education by 2015.
The project to support it has many components, including the building, upgrading and renovation
of primary schools, curricular reform, teacher upgrading, book provision at the basic education
level. At the secondary level, the program contributes to the expansion of secondary school
facilities, curriculum revision, teacher upgrading, and instructional materials and equipment. For
technical and vocational education and training, the program supports employer and market
surveys and the encouragement of private participation. For teacher training the program
contributes to upgrading and expansion of teacher training facilities, curriculum revision,
distance education, head teacher training, and establishment of national standards. The fifth
component assists in the expansion of the tertiary sector. Finally, an institutional development
component supports planning, financial management, implementation, and monitoring and
evaluation capacities of the Ministry of Education.
16. WHAT IS THE ESSENCE OF HUMAN CAPITAL THEORY AND HUMAN
DEVELOPMENT? EXPLAIN THEIR SIMILARITIES AND DIFFERENCES (IF ANY)
1. Human capital – definitions and approaches
There are several definitions and approaches to understanding human capital. Ideas about the
importance of human capital and investment in human capital was directly or indirectly associated
with the importance of education as early as the beginnings of economic theory in the work of W.
Petty and A. Smith.
1.1. Definitions of the human
 Human capital was further elaborated by economists, representatives of the Chicago School in the 60s
of the 20th century. “Attention Chicago economists also focused on building human capital theory,
which was a major contribution to theoretical research in education. Their theory of human capital has
become a „decoration‟ Chicago School,” (Volejníková, 2005).
Human capital is defined as the capacity of human being to perform work N. Bontis, N. C. Dragonetti,
K. Jacobsen a G. Roos defined the human capital as the human factor in the organization; the combined
intelligence, skills and expertise that gives the organization its distinctive character. The human
elements of the organization are those that are capable of learning, changing, innovating and providing
the creative thrust which if properly motivated can ensure the long-run survival of the organization
(1999).

Davenport says that people acquire inherent abilities, behaviors and personal energy and these elements
make up the human capital they bring to their work (1998). M. Armstrong defines the human capital as
knowledge and skills which individuals create, maintain, and use (2006). New theories of economic
growth characterized the human capital as the sum of the individual congenital and acquired skills,
knowledge, and experiences of individuals. OECD defines human capital as knowledge, skills, abilities,
and other characteristics that are relevant for economic activity.

1.2. Approaches to understanding the human capital

The above definitions imply different economists approach to defining and understanding human capital
which have not been summarized and compared.

In terms of business economics, the human capital is considered as a production factor. Managerial view
sees human capital as a business resource or asset which forms part of the market value of the company.
The macroeconomic approach sees human capital as one of the production factors, respectively sources
of the economic growth.

Human capital theory holds that the well-being of a society is a function not only of the
traditional stocks of financial capital, labour and natural resources but also of the knowledge and
skills of individuals. This “human capital” can be used like any other asset to generate outcomes
 of value to individuals and society. In particular, the theory predicts that increased knowledge
and skill will yield improved economic outcomes for both individuals and societies.

1.3. Human Capital Theory and Education

Education is a key element of human capital theory because it is viewed as the primary means of
developing knowledge and skill and because level of education is a way of quantifying the
quality of labour. Mincer (1974) is generally credited with developing the core model designed
to explain differences in individual income as a function of level of education and work
experience. Mincer’s human capital earnings function has income as the dependent variable and
years of education the main independent variable1. Work experience is also typically included in
the model as a proxy for unobserved sources of acquisition of knowledge and skill.
On an international level the economic significance of education is a focus of research by the
Organization for Economic Cooperation and Development (OECD).

Educational attainment is becoming increasingly important, relative to other factors, in shaping

young people’s life chances. Changing economic and social conditions – information and
communication technologies, the globalization of economic activity, greater personal
responsibility and autonomy in all aspects of life – have given knowledge and skills an
increasingly central role in the economic success of individuals and nations. In addition to the
growing economic importance of human capital, the social returns to learning, in the form of
enhanced personal well-being and greater social cohesion, are also significant (OECD, 2005).
Education is an investment that can help foster economic growth, contribute to personal social
development and reduce social inequality. Like any investment, it involves both costs and
returns. Some of the returns are monetary, and directly related to the labour market, while
others are personal, social, cultural or more broadly economic. Some returns accrue to the
individual while others benefit society in general, for example, in the form of a more literate and
productive population. (OECD, 1996).

17. WHAT IS THE ESSENCE OF ECONOMIC GROWTH AND ECONOMIC DEVELOPMENT?

EXPLAIN THEIR SIMILARITIES AND DIFFERENCES (IF ANY)
 Human development has recently been advanced as the ultimate objective of human activity in
place of economic growth. 1 Its intellectual antecedents may be traced to the earlier basic needs
approach of the ILO and the World Bank, as well as Sen's concept of capabilities. 2 Human
development has been defined as enlarging people's choices in a way which enables them to lead
longer, healthier and fuller lives. 3 Clearly, there exists a strong connection between economic
growth (EG) and human development (HD). On the one hand, EG provides the resources to
permit sustained improvements in HD. On the other, improvements in the quality of the labor
force are an important contributor to EG. Yet, while this two-way relationship between HD and
EG may now be widely accepted, the specific factors linking them have not been systematically
explored. Nor has the question of priorities in the phasing of policy.

 Economic growth can be defined as a sustainable increase in real Gross Domestic Product (GDP)
and real GDP per capita. GDP is the total market value of all final goods and services produced
annually by resources located within a country, regardless of their ownership. Real GDP is GDP
adjusted for inflation, that is, nominal GDP divided by the price index. Real GDP per capita is
simply real GDP divided by the total population. Thus, economic growth is a quantitative
measure.
 Economic growth is important because the bottom line for an economy is its ability to satisfy
human wants. According to McConnell and Brue (2002), there are six main components in
economic growth. These are grouped as supply, demand and efficiency factors. The supply factors
are four in number and constitute the physical ability of the economy to expand. These are the
increase in the quantity and quality of natural resources (such as arable land, forests, minerals, oil
deposits, and water resources), the increase in the quantity and quality of human resources (the
physical and mental talents of individuals as well as the entrepreneurial ability), the increase in the
supply or stock of capital goods (such as tools, machinery, equipment, factory, storage,
transportation, and distribution facilities), and improvements in technology (innovative production
techniques as well as new forms of business organization that improve the process of production).
The fifth component of economic growth is the demand factor. To achieve the higher production
potential created by the supply factors, households, businesses, and government must purchase
the economy’s expanding output of goods and services. In other words, there will be no
unplanned increases in inventories and thus resources will remain fully employed. Therefore,
economic growth requires increases in total spending to realize the output gains made available
by increased production capacity.

The sixth component of economic growth is the efficiency factor. The economy must use its
resources in the least costly way (productive efficiency) to produce the specific mix of goods and
services that maximizes people’s well – being (allocative efficiency). Thus, economic growth is
a dynamic process which entails the interaction of the supply, demand, and efficiency factors.
The study of economic development was initiated by Adam Smith in his Wealth of Nations
(1776). In recent years, the subject has gained popularity due to the works of three Nobel
laureate economists, namely, W. Arthur Lewis, Theodore Schultz and Amartya Sen.

 Economic Development can mean different things to different people. Therefore, it is

important to have a working definition in order to come up with some measurement criteria
which would enable us to determine which country is actually developing and which not. For
example, Meier (1989) defines economic development as an “upward movement of the entire
social system” or as the attainment of a number of “ideals of modernization.” The factors that he
identified for economic development include a rise in productivity, social and economic
equalization, modern knowledge, improved institutions and attitudes, and a rationally
coordinated system of policy measures that can remove undesirable conditions in the social
system. He further emphasized the rise in per capita (or per person) real income rather than
simply an increase in the economy’s real national income. Furthermore, economic development
should be viewed as a long - term (or sustainable) process rather than a short - period rise, such
as the upswing of business cycle.
One of the key issues of development is the relationship between equality (distributive justice)
and growth of income. It is often believed that growth is spurred by growing inequality of
income. To put it differently, it is argued that only the rich and the wealthy can save enough to
provide the basis for investment that is needed for growth. That growth is supposed to “trickle
down” to the rest of the population. According to Meier (1995), however, there is no conclusive
evidence that saving is positively related to income inequality or that income inequality leads to
higher growth. There are also studies by the World Bank (1993) which showed that more equal
distribution of income have contributed to rapid growth in East Asia through higher human
capital formation in terms of better health and education. From these discussions, one may
tentatively conclude by saying that the issue of income inequality and economic growth should
be analyzed in the context of individual countries and/or regions.

 Economic development is broader than economic growth. It involves all the changes in the
economy including the social, political, and institutional changes that accompany the changes
in output. In other words, economic development is a process, which combines both growth
and structural change. The term process implies the operation of certain forces in an
interconnected and causal fashion. Thus, there are qualitative dimensions in the development
process that extend beyond the growth or expansion of the economy. In this process, the
qualitative difference is likely to appear because of the improved performance of the factors
of production and the improved techniques of production. It is also likely to appear because
of the development of institutions and the changes in attitudes and values. It should further be
noted that the two processes, that is, “growth” and “development”, complement each other.
In short, economic growth is a means, while economic development is an end.
According to Todaro (2003), economic development has traditionally meant the capacity of a
national economy, whose initial economic condition has been more or less static for a long time,
to generate and sustain an annual increase in gross national product (GNP) at rates of perhaps 5%
to 7% or more. A common alternative economic index of development has been the use of rates
of growth of per capita GNP. Real per capita GNP (that is, monetary per capita GNP minus the
rate of inflation) is normally used to measure the overall economic well-being of the population.
This index is a measure of how much of real goods and services is available to the average
citizen for consumption and investment.

 Economic development in the past has also been seen in terms of the changes in the structure
of production and employment so that agriculture’s share declines and that of manufacturing
and service industries increase. Therefore, industrialization was advocated at the expense of
agriculture and rural development. These economic measures of development have been
supplemented by non-economic social indicators such as literacy rates, health conditions, and
housing. Thus, prior to the 1970s, development was seen as an economic phenomenon,
 while problems of poverty, discrimination, unemployment, and income distribution were
seen as of secondary importance.
Amartya Sen, the 1998 Nobel laureate in economics, argues that “development should be
concerned with enhancing the lives we lead and the freedoms we enjoy.” According to Sen,
what matter for human well-being are not just the commodities consumed, as in the utility
approach, but what use the consumer can and does make of the commodities. In other words, the
freedom of choice or control of one’s own life is a central aspect of well-being.
 The concept of “sustainable development” was made popular by the World Commission on
the Environment and Development which defined it as “development that meets the needs of
the present generation without compromising the needs of future generations.” Sustainable
development focuses attention on the environment by evaluating the consistency of
development with the protection and improvement of the environment. In a broad sense,
sustainable development means achieving improvements in living standards without
sacrificing the ability of future generations to enjoy at least the same standards.

18. DESCRIBE AND EXPLAIN THE ESSENCE AND APPLICABILITY OF THE THEORY
OF DEMAND AND SUPPLY IN EDUCATION. CONSIDER ALL THE
DETERMINANTS OF DEMAND AND SUPPLY OF EDUCATION.
 Supply and demand is perhaps one of the most fundamental concepts of economics and it is
the backbone of a market economy. It is refers to how much (quantity) of a product or
service is desired by buyers. The quantity demanded is the amount of a product people are
willing to buy at a certain price; the relationship between price and quantity demanded is
known as the demand relationship. The represents how much the market can offer. The
quantity supplied refers to the amount of a certain good producers are willing to supply when
receiving a certain price. The correlation between price and how much of a good or service is
supplied to the market is known as the supply relationship. Price, therefore, is a reflection of
supply and demand.
1. Demand
Demand is the rate at which consumers want to buy a product. Economic theory holds that
demand consists of two factors: taste and ability to buy. Taste, which is the desire for a good,
 determines the willingness to buy the good at a specific price. Ability to buy means that to
buy a good at specific price, an individual must possess sufficient wealth or income.
Both factors of demand depend on the market price. When the market price for a product
is high, the demand will be low. When price is low, demand is high. At very low prices,
many consumers will be able to purchase a product. However, people usually want only so
much of a good. Acquiring additional increments of a good or service in some time period
will yield less and less satisfaction.3 As a result, the demand for a product at low prices is
limited by taste and is not infinite even when the price equals zero. As the price increases, the
same amount of money will purchase fewer products. When the price for a product is very
high, the demand will decrease because, while consumers may wish to purchase a product
very much, they are limited by their ability to buy.
2. supply
Willingness and ability to supply goods determine the seller’s actions. At higher prices, more
of the commodity will be available to the buyers. This is because the suppliers will be able to
maintain a profit despite the higher costs of production that may result from short-term
expansion of their capacity5.
In a real market, when the inventory is less than the desired inventory, manufacturers will
raise both the supply of their product and its price. The short-term increase in supply causes
manufacturing costs to rise, leading to a further increase in price. The price change in turn
increases the desired rate of production. A similar effect occurs if inventory is too high.
Classical economic theory has approximated this complicated process through the supply
curve. The supply curve shown in Figure 2 slopes upward because each additional unit is
assumed to be more difficult or expensive to make than the previous one, and therefore
requires a higher price to justify its production.
1. Demand for labor by educational level
During the past decades, most OECD-countries have seen a considerable growth in the demand
for labor with higher skills and educational levels1. A large part of the increased demand has
been matched by an increased supply of highly skilled labor, reflecting increased educational
capacity. Nevertheless, increased wage differences in many countries2 indicate that the supply of
skilled labor has not increased enough to meet the growth in demand. While increased wage
differences are most evident in countries with flexible and decentralized wage formation like the
 US and the UK, the difference in unemployment rates between low skilled and highly skilled
labor has increased in countries with more rigid wage formation in continental Europe (see
Krugman, 1994). A significant part of both the increased demand for highly skilled labor and the
higher wage premiums can probably be explained by technological shifts favoring this kind of
labor, cf. Katz (1993), Katz and Autor (1999) and Wallerstein and Golden (1997).
The quantification of the behavioral relations for relative labor demand shows an effect of the
trend variable that is indicative of the occurrence of technical changes that favor high-educated
labor and disfavor low-educated labor.
2. Labor supply and unemployment by education
By definition, labor supply is the sum of employment and unemployment. Although MODAG
with heterogeneous labor contains behavioral equations for most of the labor supply, we have
chosen to let the demand for labor plus unemployment determine the labor supply, while we also
keep education-specific unemployment at a steady level. Otherwise, we run the risk of getting
unrealistic and even negative unemployment numbers when simulating in MODAG.
Nevertheless, in each education group the development of the wedge between the modeled labor
supply and the implied labor supply from the demand side may serve as a reality check.
However, the wedge constitutes a quite large and increasing group of workers, since both the
number of foreign employees16 and employees with unknown education is not part of the
modeled labor supply. In addition, there are residuals to the education-specific labor supply that
capture further differences in education classification between the modeled employment and
employment calculated from the modeled labor supply (labor supply minus unemployment).

19. THE BENEFITS OF EDUCATION CAN BE MEASURED. DO YOU AGREE WITH

THIS STATEMENT? IF YOUR ANSWER 'YES,' HOW DO MEASURE IT? IF YOUR
ANSWER 'NO' WHY?
1. Conventional Measurement Method of Human Capital
The conventional standard to measure human capital stock has been largely categorized into
three parts: Output-, Cost-, and Income-based approach. School enrollment rates, scholastic
attainments, adult literacy, and average years of schooling are the examples of output-based
approach; cost-based approach is based on calculating costs paid for obtaining knowledge; and
income-based approach is closely linked to each individual’s benefits obtained by education and
training investment.
1.1. Output-Based Approach
For the purpose of analyzing relationship between human capital and economic growth, some
economists attempted to measure the stock of human capital utilizing ‘school enrollment rates’
as a proxy of human capital (Barro, 1991; Barro & Lee, 1993). Throughout calculating the ratio
between individuals of school age and students enrolling in the educational institutions, the
economists show the stock of human capital that each country holds. However, the method
includes a drawback that a student’s effectiveness can be recognized after participating in
production activities.

In the perspective of educational attainment, Nehru, Swanson, & Dubey (1993) attempted to
measure relationship between human capital and students’ ‘accumulated years of schooling’ in
the employable age as educational attainment. Assuming that the stock of human capital is the
sum of each individual’s years of schooling; it is difficult to clearly demonstrate this relationship,
because educational attainment is a part of regular [school] education. Actually, many of adults
tend to participate in many formal education and training activities to improve their productivity.

Besides measuring the stock of human capital with school enrollment rates and educational
attainment, Romer (1990) suggested the ratio between skilled-adults and total adults to measure
the stock of human capital in the national economy. Furthermore, Organization for Economic
Cooperation and Development (OECD) utilizes International Adult Literacy Survey (IALS), the
ratio between literate adults and total adults, to measure the stock of human capital. However, the
method of IALS includes a few drawbacks in that literacy can be slightly related to labor
productivity, and the productivity can be increased by informal/non-formal learning activities
such as personal learning and On-the-Job training.

Finally, Psacharopoulos & Arriagada (1986) suggested the average years of schooling to
measure the stock of human capital. They refer that the average years of schooling is meaningful
to measure the stock of human capital as a proxy. This suggestion assumes that an individual’s
productivity is increased in proportion to his/her average years of schooling; they exemplify that
 someone’s productivity with completing twelve years of schooling is twelve times compared to
otherwise productivity with doing one years. As mentioned above, this method includes a
drawback that an individual’s years of schooling can be slightly related to his/her productivity.

4.2. Cost-Based Approach

Cost-based approach is based on measuring the stock of human capital through summing costs
invested for one’s human capital. For the purpose of calculating the invested costs, Kendric
(1976) utilized an individual’s investment costs considering depreciation, and Jorgenson &
Fraumeni (1989) presented discounted income in the future. Considering that this approach is
based on indirectly measuring stock of human capital, it is difficult to precisely classify
boundary between investment and consumption in the perspective of costs for the human capital.
4.3. Income-Based Approach
This approach is based on the returns which an individual obtains from a labor market
throughout education investment. Mulligan & Sala-i-Martin (1995) defines that aggregate human
capital is the sum of quality adjustment of each individual’s labor force, and presents the stock of
human capital utilizing an individual’s income. Considering that ‘human-unrelated factors’ can
more influence an individual’s income, this approach rarely presents a complete measurement
for human capital.
4.4. How is Currently Human Capital Measured? : Based on OECD Measures
Hansson (2008) shows that OECD measurement on human capital is closely linked to
international comparable statistics considering investment in human capital, quality adjustments,
and result of education. On the constitution of human capital measurement, Table 1 presents how
the constitution is divided into sub-factors in detail. The first sub-factor is ‘investment in human
capital’ focused on the current level of human capital investment within a national boundary, and
the second focuses on how the quality of that investment is managed and adjusted through the
international comparison of academic achievement. Finally, third sub-factor presents how the
result of educational investment is preformed after postsecondary education.
5. Demerits of the Conventional Measurement
According to Winkler (1987), the conceptual critique of human capital measurement is closely
linked to screening theory which expresses relationship between an individual’s credentials and
employability. On the criticism that an individual’s human capital increases his/her
employability, Winkler (1987) surmises that human capital investment rarely influence his/her
outcome of it. Rather, the capital-unrelated factors more affect the effectiveness of human capital
investment. In this sense, it is necessary to seriously consider which one can clearly express the
concept of human capital.

Second, the conventional measurement of human capital slightly considers the qualitative
benefits of human capital such as family health, fertility and child morality (Lewin et al., 1983;
Woodhall, 2001).
Actually, McMahon (1998) presents that the impact of human capital includes both of financial
monetary and social nonmonetary benefits with ‘lower fertility rates, lower population rates,
public health, democratization, human rights, political stability, poverty reduction, property
crime rates, environmental effects, higher divorce rates, later retirement, more work after
retirement, and community service’.

Third, other indicators that can contribute to estimate more accurate concept of human capital are
rarely considered. For example, Bassani (2008) shows that social capital can be related to human
capital to some extent. Similar to the mentioned conceptual framework, Coleman (1988)
suggested that ‘certain aspects of social capital could be directly linked to a child’s academic
success in that they provided a more supportive environment that enhanced individual levels of
achievement’. Overall, for the purpose of more precise measurement of human capital as stock, it
is necessary to consider relationship between human capital and other related factors such as
social capital.
5.2. New Approach of the Measurement
On the above-mentioned demerits of conventional human capital measurement, new additional
approach of the human capital measurement should be based on the following consideration;
what are more precise proxies for human capital measurement with the evolving of the human
capital? To begin with, the new approach of human capital measurement partially needs to
accept the conceptual framework of Human Development. Since 1990, United Nations
Development Programme (UNDP) has reported Human Development Index (HDI) investigating
most of countries, measuring a country’s human development and well-being
(http://hdr.undp.org/en/statistics/indices/hid). The structure of the index is constituted to health,
knowledge, and standard living with many sub-variables such as life expectancy at birth, adult
literacy rate, gross enrollment ratio, and GDP per capita. Considering that the HDI index
includes quality aspects, the approach of HDI focuses on all of individuals’ life quality and
economic situation. Furthermore, International Labour Office (ILO) tends to utilize the similar
index considering the quality aspects such as the Key Indicators of the Labour Market (KILM).
Therefore, it is necessary that the advanced measurement of human capital considers the concept
of ‘human development’, assuming that the concept of development includes both of quantitative
growth and qualitative progress. With referring to the concept of human development, it is
necessary that the new approach of human capital measurement needs to pay more attention to
social capital. As mentioned, an individual’s social capital is closely linked to his/her human
capital focused on the stock of knowledge.
Considering that the core of the social capital is based on the networking among constituents, it
is possible that the networking component of social capital contributes to the increase of human
capital owing to the characteristics of that: transportable, and shareable. The accumulation of
one’s human capital is easily performed through social capital. Actually, someone’s level of
knowledge and skills can be more improved by the networking of family, colleagues, social and
constituents rather than isolated situation (Coleman, 1988). This assumption can provide an
important clue in terms of understanding how human capital can play a role in social progress.
Finally, it is necessary that the new approach of human capital measurement clarifies what
indicators.

Four Types of Indicators

This paper discusses the indicators that seem most relevant in monitoring and evaluating the
performance, cost-effectiveness and equity of educational services. The main aim is to provide
aguidance on the use of indicators. Performance indicators can facilitate improvements in the
design and implementation of educational policies. They can inform us about prevailing
problems and hint at some of the causes of the problems. Obviously, as also emphasized in a
recent World Bank study (Carvalho & White, 1994), indicators are precisely what the word says
- "indicative" - and cannot be a substitute for in-depth analysis and evaluative work.
In the extensive literature on social indicators and poverty measurement the importance of an
analytical distinction between types of indicators is stressed. Indicators tend to be classified
depending on whether they reflect the means, the process, or the end in achieving the objective
of a particular set of development policies, programs or projects. Good monitoring and
evaluation should make use of an appropriate balance between different types of indicators that
can establish the link between means and ends. Prevailing classifications of indicators are
roughly similar, though some important differences exist. Here, it is proposed to distinguish four
types of indicators: (i) input indicators; (ii) access indicators; (iii) output indicators; and (iv)
outcome indicators.
Efficiency and Equity
The second level of analysis is concerned with the efficiency and equity of the educational
system, hence with the relationship between inputs and output or costs and benefits of the
educational system and with the question of how the cost and benefits are distributed among the
members of society.
Efficiency
There are two sides to efficiency in education: internal efficiency and external efficiency. The
external efficiency has to do with the extent to which the educational system generates the
necessary skills for a smooth running of the economy and society in a broader sense.
In general, improved indicators for the knowledge-based economy are:
measuring knowledge inputs;
measuring knowledge stocks and flows
measuring knowledge outputs;
measuring knowledge networks; and
measuring knowledge and learning.

20. TO WHAT EXTENT ECONOMICS OF EDUCATION HELP TO ENHANCE

POLICIES, PLANNING AND STRATEGIES? RELATE THE CONTEXT OF
ETHIOPIA. TRY TO ADDRESS ALLTHE MAJOR PROBLEM THAT ARE
INDICATED ON THE CURRENT EDUCATION AND TRAINING POLICY OF THE
NATION (TGE, 1994).
Economic context
In this area, the analyst wants to understand the present macro-economic situation in general and
the human resources situation in particular. It is, however, more important to estimate the likely
trends in the various sectors in the future and the financial resources of the country in order to
assess what the economy requires from the education sector and what the sector expects to face
from the rest of the economy, particularly in terms of general infrastructure and financial
resources. First, variables such as demographic shifts, urbanization, and migration, coupled with
the likely growth in various sectors of the economy, will have a significant impact on labour
markets and consequently on needs for education and skill training. Second, the level of
economic development will set enormous constraints on the capacity of the educational system
to build schools and to expand. It is difficult to build schools without the necessary economic
infra-structure to say nothing of the presence of firms with the necessary capabilities. The level
of economic development also sets the range of possible taxation by the government, which in
turn will influence educational expenditures. Third, the economic growth rate is important not
only for estimating the likely need for certain kinds of skills but also for estimating the future
amounts of slack resources. This is necessary because, as the rate of growth increases, more
funds are often made available to education; by the same token, as it decreases, allocations to
education are among the first cut.
Education sector
Sector analysis starts with an identification and understanding of the major sectoral issues
relevant to the country. These issues may be explored under six categories: (i) access to
educational opportunities; (ii) equity in the distribution of educational services;
(iii) structure of the education system; (iv) internal efficiency; (v) external efficiency; and (vi)
institutional arrangements for the management of the sector. For a full description of these
components and the analytic techniques utilized refer to Haddad and Education policy-planning
process: Demsky (1994), Kemmerer (1994), Coombs and Hallak (1987), Mingat and Tan
(1988), and Windham (1988a, 1988b). An analysis of the above issues should take into
consideration their evolutionary nature: how have issues in the development of the educational
system changed over time? The meeting of one educational need or solution of one problem
frequently creates another. For example, the expansion of the system and the provision of new
facilities naturally lead to issues about the quality of the education provided and the capacity of
the educational administration to handle a larger educational system. In addition, the analysis of
education across time can sensitize one to the tendency for the system to oscillate between
objectives which are somewhat incompatible.
A historical and evolutionary perspective on the dynamics of policies across time allows the
analyst a better sense of why a particular policy is being advocated at the moment. By studying
the past, one also learns the likely speed with which educational policies can be implemented.

q21. the historical development of planning and economics of education in brief.

history of the economics of education

the short history of the economics of education economists are normally associated with ensuring
that profit-making companies and the overall economy functions well, but they have slowly
expanded their interests to new spheres of society. the origin of the economics of education as a
significant field within economics dates back to the theoretical and empirical developments made
by american economists such as gary becker and jacob mincer in the
1960s.their work introduced the idea of education as human capital and they attempted to
calculate the economic returns to acquiring education. over the past decade there has been an
enormous growth of interest by economists in education policy, both in the uk and across the
world. this has been accompanied by a growing political interest in market-based reforms across
the public sector. these types of reforms include devolvement of financial planning to front-line
institutions such as hospitals and schools and giving consumers of public services choice about
which provider to use. economists from other fields such as labor economics have been attracted
by the growing availability of large- scale datasets that facilitate complex statistical analysis to
analyse the impact of particular policy initiatives. examples of these data include the national
pupil database in england, which has collected annual information on the background
characteristics and key stage attainment data of all pupils in state-maintained schools since 2002,
and the pisa, an international survey of the skills of 15 year olds across many industrialized
countries.

q22.the essence of fiscal decentralization focusing on the ethiopian context

decentralization
 decentralization is a broad concept that deserves careful analysis. central governments around the
world are decentralizing fiscal, political and administrative responsibilities to lower level governments
and to the private sector. however, the extent and forms of decentralization vary (dillinger, 1995:1). the
amount of power that the central government gives up to subordinate or semiautonomous institutions
depends on the form of decentralization used and the amount of support that the central government
provides to the organizational units in carrying out decentralized functions.
decentralization can take a number of forms. rondinelli identified two distinctions that decentralization
can take (1981: 137). first, distinctions can be made between functional and areal decentralization.

functional decentralization.

functional decentralization focuses on the transfer of authority to perform specific tasks or 12 activities
to specialized organizations that operate nationally or at least across local jurisdictions.
areal decentralization
is always primarily aimed at transferring responsibility for public functions to organizations within
well-defined sub-national spatial or political boundaries. usually the transfer or delegation of authority is
to an institution that may legally perform those functions only with in a specified geographical or
political boundary.
other distinction can be made among three degrees of decentralization: deconcentration, delegation and
devolution.

fiscal decentralization
fiscal decentralization deal with how the government sector is organized and financed. nowadays, fiscal
decentralization, that is, the proper location by level of government of various taxes, spending programs,
grants and regulations is becoming an important issue not only in the literature but also in the real world
(kibre, 1994:2) this emphases on setting the appropriate expenditure and tax assignments for each tire of
government and on designing inter government transfers (litvack, et al. 1998:10). thus,
intergovernmental fiscal relations study how these different levels of government interact with each
other on fiscal issues. the assignment of fiscal decision making powers and management responsibilities
to lower levels of government has four building blocks (boxe, 2001:5). these are:
 1. the assignment of expenditure responsibilities: - what are the functions and responsibilities of
each level of government?
2. assignment of revenue sources: -which tax or non-tax revenue sources will be made available
to sub national governments in order to provide them with resources
3. intergovernmental fiscal transfers: in addition to assigning revenue sources, central
governments may provide regional and local governments with additional resources through a
system of intergovernmental transfer or grants.
4. sub national deficits, borrowing and debt:
if sub national governments do not carefully balance their annual expenditures with revenues and
transfers, this will result in sub national defects and the incurrence of debt.

assignment of expenditure responsibilities

one of the underlying arguments for fiscal federalism is that assigning expenditure responsibilities and
decision making powers to lower levels of government can improve a state’s ability to efficiently
identify and address its citizens' needs. being close to the beneficiary population, lower levels of
governments have an informational advantage over the federal government as they can better see their
constituents' needs. they also know the local conditions that are important in internalizing benefits and
costs of public service provision. more over, local governments have a greater incentive to improve
service delivery; beneficiaries and citizen groups can easily monitor their actions and evaluate them
through local actions realization of these benefits, however, is not guaranteed. careful attention needs to
be given to policy design, particularly in quickly evolving, highly decentralized systems such as ethiopia
(world bank, 2000:3).
assignment of tax sources
once the assignment of expenditure responsibility has been determined, the second key question is: who
gets what resources? obviously, an important determinant of the assignment of revenue sources to sub
national governments is the assignment of expenditure responsibilities, giving rise to the adage: finance
should follow functions (boex, 2001:6). in addition to determining how much revenue sub national
governments need, it is also important to consider which revenue sources local governments should
receive. the fiscal federalism literature underlines several important considerations that need to be borne
in mind while discussing tax assignment. accordingly, the principle of tax assignment involves issues
such as: what type of taxes should be levied and collected by which level of government, and on what
principles? on what criteria should the proceeds accrue both vertically and horizontally (world bank,
2000:14, and, kibire, 1994: 5)?

fiscal imbalance

any type of federal arrangement involves a division of functions between the central government and
sub national governments (expenditure assignment) as well as assignments of different sources of
revenue to different types of government (revenue assignment) (eshetu, 1994:169). in such
circumstances, eshetu noted, only rarely does one encountered balance between the spending needs and
revenue capacity of either the central government or the regions, and all too often, either the center or
the region is unable to cover its expenditure from its own fiscal resources.sub national governments
often suffer from problems of capacity with respect to tax administration (kelly, 1999:7). the sub
national government capacity limitations with respect to tax administration often coupled with
centralization of productive revenue sources by the central government lead to the emergence of vertical
imbalance (world bank, 2000:24). in addition, the bank adds, when inter-regional equity is an important
consideration, the federal government needs to hold some revenues over and above those required for its
own expenditures to distribute them among the sub national governments in a way that would promote
equity. there are two forms of imbalance vertical imbalance and horizontal imbalance.
vertical fiscal imbalance is the disparity between revenue means and expenditure needs at
various levels of government in a federation (bahl et.al. 2001:1).
horizontal fiscal imbalance refers to "inconsistency between raising ability and fiscal needs of
governments at the same level in a federation" (kibre, 1994:9).
fiscal decentralization, which addresses the fiscal relationship between different levels of
government, determines which taxes are to be collected by which level of government and the
expenditures to be covered by the various levels of government. and also it addresses the issues 16 of
vertical and horizontal fiscal imbalances among levels of government, the intergovernmental transfer or
grant mechanisms to fill the gap and legal framework for sub-national borrowing.
given the above theoretical and conceptual implications of fiscal decentralization, ethiopia has
established regional governments with corresponding laws on decentralization of fiscal powers, and
substantial institutional changes in the fiscal and monetary management of the country. the
decentralization of fiscal powers has been sought as part of the general trend away from central
government control of economic activities and as part of the effort to meet demands for democratization
and local political autonomy (girma, 1994:121).

q23.the due attention given to primary education in ethiopia when compared to the other sub-sectors.

the government achieved impressive improvements in primary and secondary education,

prospects for universal education in the near future were not bright. in 1985/86, the latest year for
which government statistics were available, enrollment in the country's primary, junior
secondary, and senior secondary schools totaled 3.1 million students, up from the nearly 785,000
enrolled a decade earlier. only about 2.5 million (42 percent) of the 6 million primary school-age
children were enrolled in school in 1985/86. junior secondary school enrollments (grades seven
and eight) amounted to 363,000, while at the secondary school level (grades nine through
twelve), only 292,385 out of 5.5 million, or 5.3 percent, attended school. in addition, prospects
for continued study for most primary school graduates were slim. in 1985/86 there was only one
junior secondary school for every eight primary schools and only one senior secondary school
for every four junior secondary schools. there were many primary school students for whom
space would not be available and who therefore would most likely end up on the job market,
where work already was scarce for people with limited educations.( source: u.s. library of
congress)
beginning in 1975, a new education policy emphasized improving learning opportunities in the
rural areas as a means of increasing economic productivity. in the mid-1980s, the education
system was still based on a structure of primary, secondary, and higher education levels, much as
it was during the imperial regime. however, the government's objective was to establish an eight-
year unified education system at the primary level.. this curriculum emphasized expanded
opportunities for nonacademic training. the new approach also decentralized control and
operation of primary and secondary schools to the subregional level, where the curriculum
addressed local requirements. in each case, committees drawn from the peasant associations and
kebeles and augmented by at least one teacher and one student over the age of sixteen from each
school administered the public schools. students used free textbooks in local languages. in late
1978, the government expanded the program to include nine languages, and it adopted plans to
add five others.
the existing ethiopian institutional arrangement has been effective in creating access to primary
education but ineffective and hence dysfunctional to attain quality of primary education and
minimize inefficiency. even though, a lot remains to be done to ensure universal primary
education in the country, the existing institutional arrangement has been effective in creating
access to primary education. the expansion of the schooling infrastructure to the extent of
establishing more than an average of 30 primary schools in a district in the country is quite an
achievement in terms of creating the foundation for access to primary education. the net
enrolment rate, which has increased from the order of 25% in 1996/97 to 83% in 2008/09, is
indeed a commendable stepping stone towards ensuring universal primary education in ethiopia.
yet, there are fundamental quality and efficiency problems that jeopardize the very goals of the
country’s educational policy. for instance, completion rates have been quite low, indicating quite
substantial loss of scarce school resources in the ethiopian primary education system. grade 8
completion rate as of 2008/09 was 45%, which, is more likely to frustrate the government
objective of achieving of completion of primary education by 2015. more daunting is the fact
that attainments in cognitive numeracy and literacy skills have remained low and declining. the
composite mean scores for grade four has declined from the order of 48% in the first and 2nd
rounds to about 41% in the third round. the grade eight national composite mean score is lower
than the fourth grade level, probably indicating the cumulative effect of quality problems
in preceding grades. the results of the national assessment surveys do indicate the fact that
completing a full course of primary schooling has not been effective to produce a generation
with the desired human attributes that the education policy of the country aims to achieve.this
poor performance of the primary education of the country has been experienced when
concurrently real school resources have been improving over time. the number of schools,
number of teachers, the competency ratio of 266.
primary school enrollment increased from about 957,300 in 1974/75 to nearly 2,450,000 in
1985/86. there were still variations among regions in the number of students enrolled and a
disparity in the enrollment of boys and girls. nevertheless, while the enrollment of boys more
than doubled, that of girls more than tripled. urban areas had a higher ratio of children enrolled in
schools, as well as a higher proportion of female students, compared with rural areas.
there has been an established institutional arrangement in the country. there is a well-developed
decentralized governance structure up to district and community level and an established internal
and external supervision and monitoring system. moreover, there are parental committees in
every school. but the existing institutional arrangement has failed to inspire and motivate the
teacher, to realize the constitutional principles and policy objectives
of the government. the country needs to urgently reorient its teacher’s management philosophy
towards teacher-centred development path of the teaching profession. the incremental benefits
from a school reform that enlists the hearts and brains of every teacher to ensure effective
teaching service should be significantly larger than the incremental cost required in ensuring a
motivated and devoted teacher.

q24. the concept efficiency and effectiveness? relate the context of the education system
/schools/ of ethiopia

the concept of efficiency and effectiveness

effectiveness and efficiency are typically pursued together in education policy and this review
aims to support both. the idea behind these concepts is to ensure that resources (such as direct spending,
teaching time and materials) are used in educational activities so that they produce desired outputs (such
as completion rates, diplomas and learning achievements). while the concepts of effectiveness and
efficiency are closely related, they differ in the emphasis placed on the monitory value of input
efficiency
the conceptualization of school efficiency seems to access to education by increasing education
opportunities to school-age population. due to this many countries in africa, including ethiopia have
focused attention on increasing resources to education sector to achieve upe goals. thus, these countries
now faced with the problem of trade-off between enhancing the efficiency of the education sector and
increasing access of primary, secondary and territory education (abagl, 1997). this is to mean that
educational expansion affects the efficiency of the education system. as substantial amount of resource
is assigned for increasing educational access, the educational efficiency is facing a challenge, because
the system is not getting adequate resources solve problem in inputs, process and output of the education
system. secondly, the knowledge about what education efficiency entails is limited. that is, very little is
known about the efficiency with which various schools raise pupils learning and/or achievement. but as
the official budgetary allocation to education shrinks inefficiency is a problem that needs to be
understood and solved. thirdly, as poverty increases and the level of investment in education declines,
policymakers are looking for innovative and feasible strategies for improving the operation of the
education system and making education promote national development a question facing policy makers
is how can available resources be used more efficiently in a proposal to make education achieve its
objectives at house hold and national level.

internal and external efficiency

efficiency can be seen from two perspectives: internal and external efficiency. ,
external efficiency
external efficiency refers to the attainment of social goals or objectives. it measures, as mentioned
above, not the 'immediate output but the ultimate benefits ' that is gained by passing through the system.
external efficiency of an educational system is realized through the relevance of education to socio –
economic conditions of a country. the ability of graduates to enter the labor market following the
completion of education can be seen as an indicator of educational efficiency (tsang, 1988).
internal efficiency
internal efficiency of education refers to the relationship between systems‘ (and sub systems) outputs
(learning achievements) and the corresponding inputs that went in to creating them …. .it is concerned
with the provision of more education to produce a given output by using less input of resources. internal
efficiency of an education system is concerned with the relationship between the inputs and outputs of
an education system (coombs and hallak, 1987:9)internal efficiency may be judged in terms of its cost-
effectiveness, with effectiveness measured in this context by the systems immediate out puts as distinct
from its ultimate benefits. the knowledge, skills, attitudes and exposures the students acquire from the
schools are indicators of the output of an education system. coombs & hallak, (1987: 7-8);
psacharopoulos and loxley (1985; 68). inputs are the various elements that enable the education system
to properly function. inputs include the human resources which include teachers, educational managers,
students and nonhuman resources like; educational materials, buildings, different machineries and
equipment that are required for the normal function of a teaching –learning process that takes place in a
school. education output, on the other hand, refers to the expected results of the objectives of the system
mainly student achievement.
 effectiveness
educational effectiveness refers to the ability of a school or school system to adequately accomplish
stated education objectives. studies of educational effectiveness analyze whether specific resource inputs
have positive effects on outputs, and if so, how large these effects are (lockheed and hanushek, 1994).
however, effectiveness analyses are not necessarily concerned with money and the cost of different
inputs. the conceptual framework proposes four main issues for analysis:
(i)effective resources governance within the school system; (ii) effective distribution of resources across
the system;(iii) effective utilization of resources once they have been allocated to different priorities and
programmes; and (iv) effective management of resources at different levels of the system the essus are
explained below.
1. effectiveness of resource governance.
this issue is concerned with how resources can be effectively governed within school systems. one
aspect analyses how the effectiveness of resource use is influenced by the key foundations of school
systems. the latter relate to aspects such as the level of resources available for education, sources of
revenue for education (e.g. relative importance of public and private resources) and approaches to school
system governance (e.g. size of private sector, level of parental choice, structure of schooling). another
aspect relates more directly with the governance of resource use. it includes the planning of resource use
(e.g. definition of priorities and targets, distribution of responsibilities for resource) and the
implementation of policies to improve the effectiveness of resource use in(e.g. communication and
consultation with relevant stakeholders about resource use).
2. effectiveness of resource distribution.
this issue is concerned with how resources can be effectively distributed across the school system. this
includes the distribution of resources between the different levels of the administration (e.g. central,
state, regional and local), across resource types (e.g. human resources, physical resources, targeted
programs), between levels of the school system (e.g. pre-primary, primary, secondary), between
different sectors (e.g. general programs, vocational programs) and between individual schools (e.g.
through funding formulae and special targeted programs). in addition, it also deals with the distribution
of school facilities and materials (e.g. organization of the school network), the organization of teacher
resources (e.g. number of teachers; teacher preparation), the organization of school leadership resources
(e.g. number and profile of school leaders) and resources targeted at specific student groups (e.g. special
needs; programs for disadvantaged students).
3. effectiveness of resource utilization.
making resource decisions is not only about distributing resources across the system but also about
ensuring that such investments translate into improved teaching and learning at the school level. this
issue analyses how resources can be effectively used and allocated, through specific policies and
practices, to different priorities and programs once they have reached different levels of the school
system. among other things, it considers how resources are matched to students’ needs (e.g. grouping of
students within schools; student support systems; programs to prevent early school leaving); how
teacher resources and teaching time are allocated to students so that they optimally respond to
improvement priorities (e.g. class size, teacher-student ratios, use of teachers’ time); how student
learning time is organised (e.g. instruction time, length of school day); how school leadership is
organised and distributed; how resources in schools are organized to create environments conducive to
effective teaching and learning (e.g. outreach to parents and communities); and how school facilities and
materials are used to support such environments (e.g. use of school facilities for afternoon tutoring or
summer schools).

4. effectiveness of resource management.

resource utilization in the school sector does not happen in isolation. it takes place within institutional
contexts that may facilitate or hinder effective resource allocation and use. this issue is concerned with
how resources can be effectively managed at all levels of the school system. it looks at capacity building
for resource management (including the competency frameworks and professional development
opportunities available to support resource management capacity); the monitoring of resource use (e.g.
audit systems, evaluation of resource managers); transparency and reporting; and incentives for the
effective use of resources (outcome-based planning; rewards and sanctions).
q25.describe and explain the types of capital by relating to the education system of ethiopia.

educational capital
educational capital refers to educational goods that are converted into commodities to be bought,
sold, withheld, traded, consumed, and profited from in the educational system. educational
capital can be utilized to produce or reproduce inequality, and it can also serve as a leveling
mechanism that fosters social justice and equal opportunity. educational capital has been the
focus of study in economic anthropology, which provides a framework for understanding
educational capital in its endeavor to understand human economic behavior using the tools of
both economics and anthropology.
there are five types of sustainable capital from where we derive the goods and services we need
to improve the quality of our lives.
natural capital
natural capital is any stock or flow of energy and material that produces goods and services. it
includes resources - renewable and non-renewable materials sinks - that absorb, neutralise or
recycle wastes, processes - such as climate regulation. natural capital is the basis not only of
production but of life itself!
human capital
human capital consists of people's health, knowledge, skills and motivation. all these things are
needed for productive work. enhancing human capital through education and training is central
to a flourishing economy.
social capital
social capital concerns with the institutions that help us maintain and develop human capital in
partnership with others; e.g. families, communities, businesses, trade unions, schools, and
voluntary organizations. manufactured capital comprises material goods or fixed assets which
contribute to the production process rather than being the output itself – e.g. tools, machines and
buildings.
financial capital
financial capital plays an important role in our economy, enabling the other types of capital to be
owned and traded. but unlike the other types, it has no real value itself but is representative of
natural, human, social or manufactured capital; e.g. shares, bonds or banknotes.
from all the capital listed human capital is the most important one for education. human capital is
important in education b/c there are three large policy domains for which education is critical.
first, a country’s stock of skills is central to the potential for economic growth in a highly
competitive international environment. second, the distribution of that human capital is a key
determinant of income inequality, ever more important with a high wage premium for skills.
third, the link between a person’s human capital and their background is a fundamental
determinant of social mobility and the perpetuation of disadvantage.since human capital is
important for education there need to be the formation of it.

formation of human capital

the term human capital formation implies the development of abilities and skills among the population
of the country. in order to transform the liability of the huge size of population into assets adoption of
various measures for human capital formation is very much essential.
according to harbison, the human capital formation indicates, “the process of acquiring and increasing
the number of persons who have the skills, education and experience which are critical for the economic
and the political development of the country. human capital formation is thus associated with investment
in man and his development as a creative and productive resource.”
in order to develop various sectors of the economy, a country should introduce manpower planning for
the development of its human resources. manpower planning indicates planning of human resources for
meeting the development needs of the economy.
most of the underdeveloped countries are suffering from low rate of economic growth which is again
partially resulted from lack of investment in human capital. these underdeveloped countries are facing
mainly two basic problems. they lack critical skills very much needed for the industrial sector and again
have a surplus labour force. thus human capital formation wants to solve these problems by creating
necessary skills in man as a productive resource and also providing him gainful employment.
human capital is, therefore, required “to staff new and expanding government services, to introduce new
system of land use and new methods of agriculture, to develop new means of communication, to carry
forward industrialisation and, to build the education system.