HUMAN CAPITAL FORMATION

Qno. NCERT Anwers

1. What are the two major sources of human capital in a country?
Ans. The two major sources of human capitals are; (i) Investment in education;
(b) Investment in health.

2. What are the indicators of educational achievement in a country?

Ans. The indicators of educational achievement in a country are (i) Adult Literacy
Rate; (ii) Youth Literacy Rate; (iii) Primary Completion Rate

3. -
4. Bring out the differences between human capital and human development?
Ans. The differences between human capital and human development are:
Human capital Human development
This considers education and health as It is based on the idea that education
a means to increase labour and health are integral to human well-
productivity. being because only when people have
the ability to read and write and the
ability to lead a long and healthy life,

Human capital is a narrow concept Human development is a broader

which treats human beings as a means concept which considers human beings
to achieve an end which is higher as ends in themselves. Human welfare
productivity, failing which the can be achieved through investment in
investment is not considered education and health every individual
productive has the right to be literate and lead a
healthy life.

5. How is human development a broader term as compared to human capital?

Human development is a broader term as compared to human capital because:
▪ Human Capital treats human beings as a means to an end, whereas,
according to human development, human beings are ends in themselves.
▪ The concept of human capital assets that any investment in education
and health is unproductive if it does not enhance output of goods and
services. However, according to human development, human welfare
should be increased through investments in education and health even if
such investments do not result in higher labour productivity.
So, it can be concluded that human development is a broader term as
compared to human capital

6. What factors contribute to human formation?

Ans. The following factors contribute to human capital information; (i)
Expenditure on Education; (ii) Expenditure on Health; (iii) On-the-job-
training; (iv) Expenditure on Migration; and (v) Expenditure on
Information. For a detailed explanation on all these factors, refer “Sources
of Human Capital Formation”
7. Mention two government organisations each that regulate the health and
education sectors.
Ans. Regulatory Authority in Health: (i) Ministers of health at the union and state
level; (ii) Indian Council for Medical Research (ICMR).
Regulatory Authority in Health: (i) Ministers of education at the union and
state level; (ii) National Council of Educational Research and Training
(NCERT)

8. Education is considered an important input for the development of a nation.

How?
Ans. Education is considered an important input for the development of a nation
because:
(i) Education confers higher earning capacity on people.
(ii) It gives better social standing and pride.
(iii) It enables one to make better choices in life.
(iv)It provides knowledge to understand the changes taking place in society.
(v) It also stimulates innovations.

9. Discuss the following as a source of human capital formation:

(i) Health infrastructure
(ii) Expenditure on migration
Ans. (i) Health infrastructure: Health is a source of human capital formation as
it directly increases the supply of healthy labour force.
▪ Poor health and undernourishment adversely affect the quality of
manpower. A sick labour, without access to medical facilities, is
compelled to abstain from work and there is loss of productivity.
▪ Therefore, expenditure on health is important to build and maintain
productive labour force and to improve quality of life of people in the
society.
▪ Adequate food and proper nourishment to people, along with adequate
health and sanitation facilities leads supply of healthy labour force thus
it leads qualitative improvement in human capital.
▪ Forms of health Expenditure: The various forms of health expenditures
include;(a) Preventive Medicine known as vaccination; (b) Curative
Medicine; i.e., medical intervention during illness; (c) Social Medicine,
i.e., spread of health literacy; (d) Provision of clean drinking water; (e)
good Sanitation facilities.
(ii) Expenditure on Migration:People migrate from one place to another in
search of jobs that fetch them higher salaries.
▪ Unemployed people from rural areas migrate to urban areas in search of
jobs.
▪ Technically qualified persons (like engineers, doctors, etc.) migrate to other
countries because of higher salaries that they may get in such countries..
▪ Migration in both these cases involves cost of transport, higher cost of
living in the migrated places and psychic costs of living in a strange socio
cultural setup.
The enhanced earning in the new place outweighs the costs of migration.
Expenditure on migration is a source of human capital formation as enhanced
earnings in the migrated place is more than the increase in costs due to migration
10. Establish the need for acquiring information relating to health and education
expenditure for the effective utilization of human resources.
Ans. The expenditures on education and health make substantial long-term
impact and they cannot be easily reversed.
. People spend to acquire information relating to the labour market and other
markets like education and health. For example, people want to know the level of
salaries associated with various types of jobs, whether the educational institutions
provide the right type of employable skills and at what cost. This information is
necessary to make decisions regarding investments in human capital as well as for
efficient utilisation of the acquired human capital stock. Expenditure incurred for
acquiring information relating to the labour market and other markets is also a
source of human capital formation.

11. How does investment in human capital contribute to growth?

Ans. Investment in human capital contributes to growth of the economy;
(i) Higher production and productivity: The contribution of an educated
person to the output or production is more than that of an illiterate person.
Similarly, a healthy person also contributes to economic growth by
providing uninterrupted labour supply for a longer period of time.
(ii) Promotes inventions, innovations and technological improvements:
The human capital formation (HCF) not only increases the productivity of
human resources but also stimulates and creates ability to absorb new
technologies. Education provides knowledge to understand changes in
society and scientific advancements, thus, facilitate inventions and
innovations. Similarly, the availability of educated labour force facilitates
adaptation to new technologies.
(iii) Improves quality of life:
i) It is indicated by income and health.
ii) Income and health depends upon the level of education and skill
formation.
iii) Illiterate and unhealthy people cannot contribute much in the
development of the country.
iv) Better quality of population means more economic growth
(iv) Raises life expectancy:
Human capital formation raises life expectancy. A long life and a healthy life
adds quality of life

12. ‘There is a downward trend in inequality world-wide with a rise in the average
education levels’. Comment.
Ans. The given statement is correct. Labour skill of an educated person is
more than that of an uneducated person, which enables him to generate more
income than the uneducated person. The higher income earning capacity and
greater acceptability of modern techniques raise the standard and quality of
living. As a result, the gap between the rich and the poor is narrowing slowly.
So, rise in average education levels reduces the inequality of income
worldwide

13. Examine the role of education in economic development of a nation. (Refer to

answer 8)
14. 14. Explain how investment in education promote economic growth ( refer to
answer 8)
15. 15. Bring out the need for on the job training. For a person.
The productivity of physical capital is substantially enhanced with the improvement
in human capital. Due to this reason, many firms provide on-the-job training
to their workers.
▪ Such training has the advantage that it can be provided fast and without
much cost.
▪ It increases the skill and efficiency of the workers and leads to an increase
in production and productivity.
▪ On-the-job-training may take different forms: (a) Workers may be trained in
the firm itself under the supervision of a skilled worker; (b) Workers may be
sent for off-campus training.
▪ After On-the-job-training of employees, firm insist that the workers should
work for a specific period of time, so that it can recover the benefits of the
enhanced productivity owing to the training.
▪ It is a source human capital formation as return of expenditure on such
training, in the form of enhanced labour productivity, is more than the cost
of it.

16. Trace the relationship between human capital and economic growth.
Ans. Human capital formation raises the process of economic growth and
economic growth raises the process of human capital formation. There is a
cause and effect relationship between human capital and economic growth.
1) The causality between human capital and economic growth flows in either
directions. That is, higher income causes building of high level of human capital
and vice versa, that is, high level of human capital causes growth of income.
2) The enhanced productivity of human beings or human capital contributes
substantially not only towards increasing labour productivity but also stimulates
innovations and creates ability to absorb new technologies.
3)Increase in human capital are crucial to achieving increase in GDP. Therefore we
can say that HCF accelerates economics growth whereas economic growth in turn
facilitates HCF
17. Discuss the need for promoting women education in India.
Ans. Women education needs to be promoted;
▪ To improve economic independence and social status of women ; and
▪ Women education makes a favourable impact on fertility rate and health
care of women and children.
▪ To bring positive development in gender equity
Therefore, we cannot complacent about the upward movement in the
literacy rates and we have miles to go in achieving cent per cent adult
literacy.

18. Argue in favour of the need for different forms of government intervention in
education and health sectors.
Ans. The expenditure on education and health assume great importance on the
formation of human capital. To ensure favourable benefits of such
expenditure, government intervention is important because of following
reasons;
1. The expenditures on education and health make substantial long-term
impact and they cannot be easily reversed. For example, if a child is
admitted to a school or health care center and required services are not
provided in such institute, then substantial amount of damage would have
been done before the decision is taken to shift the child to another institution.
2. Individual consumers of these services do not have complete information
about the quality of services and their costs.
3. The providers of education and health services may acquire monopoly
power and may get involved in exploitation.
So, the role of government is to ensure that the private providers of these
services
adhere to be standards stipulated by the government and charge the correct
price.
Furthermore, when basic education and health care is considered as a
right of the citizens, then it is essential that the government should
provide education and health services free of cost for the deserving
citizens and those from the socially oppressed classes.

19. What are the main problems of human capital formation in India?
Ans. The various problems of human capital formation are:
1)Education for all-still a distant dream: Though literacy rates for both adults
as well as youth have increased, still the absolute number of illiterates in India
is as much as India’s population was at the time of independence.
2) Gender inequality: The differences in literacy rates between males and
females are narrowing signifying a positive development in gender equity, still
the need to promote education for women in India is imminent for various
reasons such as:
a) improving economic independence
b) social status of women and
c) favorable impact on fertility rate and health care of women and children
3) Higher education- a few takers: The Indian education pyramid is steep,
indicating lesser and lesser number of people reaching the higher education
 level. Moreover the level of unemployment among educated youth is the
highest.
4) Insufficient on-the-job-training in agriculture: Agriculture sector is
neglected where the workers are not given on-the-job-training to absorb
emerging new technologies.
5) Insufficient resources:The resources allocated to the formation of human
capital have been much less than the resources required. Due to this reason, the
facilities for the formation of human capital have remained grossly inadequate.
6) Serious inefficiencies:There is a lot of wastage of society’s resources as
capabilities of educated people are either not made use of (in case of
unemployment) or are underutilized (in case of underemployment). Massive
illiteracy, non-education of many children, poor health facilities are other
inefficiencies, which have not been attended to adequately and properly.
7)Brain Drain:people migrate from one place to another in search of better job
opportunities and handsome salaries. It leads to the loss of quality people like
doctors, engineers, etc. who have high caliber and are rare in a developing
country. The cost of such loss of quality human capital is very high.
8)High growth of Population:The continuous rise in population has adversely
affected the quality of human capital. It reduces per head availability of the
facilities.
9)Lack of proper manpower planning: There is an imbalance between the
demand and supply of human resources of various categories, especially in case
of highly skilled personnel. The absence of such balancing has resulted in the
wastage of resources.
10) Weak science and technology: In respect of education, the performance is
particularly unsatisfactory in the fields of science and development of modern
technology.

20. In your view, is it essential for the government to regulate the fee structure in
education and health care institutions? If so, why?
Ans. Yes, it is essential for the government to regulate the fee structure in
education and health care institutions because;
(i) Individual consumers of these services do not have complete information
about the quality of services and their costs or fees structure.
(ii) The providers of education and health services may acquire monopoly
power and may get involved in exploitation by charging excessive fees.
• In a developing country like ours, with a large section of the population
living below the poverty line, many of us cannot afford to access basic
education and health care facilities.
• Moreover a substantial section of our people cannot afford to reach super
specialty health care and higher education.
• Furthermore, when basic education and health care is considered as a right
of the citizens, then it is essential that the government should provide
education and health services free of cost for the deserving citizens and those
from the socially oppressed classes.
• Both the union and state governments have been stepping up expenditures
in the education sector over the years in order to fulfill the objective of
 attaining cent per cent literacy and considerably increase the average
educational attainment of Indians.

Extra questions
1. What is the reason for the existence of both private and public institutions
in the education and health service markets?
2. Why do we observe regional differences in educational attainment in India.
3. What are the indicators of educational achievement in a country?
4. Why have economists stressed the need for expanding educational
opportunities in India?
5. What are the sources of human capital formation?
6. Spending on education by individuals is like spending on capital goods by
companies. Explain how.
7. Enumerate various forms of health expenditure.
8. How is health expenditure source of HCF
9. Why do technically qualified persons like engineers and doctors, migrate to
other countries?
10. Why is it necessary to incur expenditure for acquiring information relating
to labour market and other markets?
11. Who contributes more to national income – a worker in a factory or a
software professional and why?

Comparison Between Physical and Human Capital

Physical Capital Human Capital
Physical capital is tangible and can Human capital is intangible and
be easily sold in the market. cannot be sold in the market.
It depreciates with the passage of Ageing leads to depreciation, but
time due to constant use can be minimized
It is more mobile between Human capitals is less mobile
countries. between countries as compared to
physical capital.
Physical capital (like machinery) Human capitals (like skills of a
can be separated from its owner. person) cannot be separated from
the owner.
creates private benefit Creates private and social benefit.
Can be traded in the market Only services of human capital can
be sold