Human Capital Formation in India: NBSE Class 12 Economics

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Here, you will find summaries, questions, answers, textbook solutions, pdf, extras etc. of (Nagaland Board) NBSE Class 12 (Arts/Commerce) Economics Chapter 6: Human Capital Formation in India. These solutions, however, should be only treated as references and can be modified/changed.

Introduction

Getting educated is critical for improving one’s ability to produce goods and services. Individuals invest in education to increase future incomes. Governments also invest in education as expanding educational facilities impacts economic development. The chapter discusses how human beings are resources and how investing in human capital formation through education, health, training etc. can contribute to economic growth and development.

Human capital refers to the skills, health, knowledge embodied in human beings that increase productivity. It requires expenditures on education, health care, training programs etc. The major sources of human capital formation are education, health, training, information and migration. Education improves efficiency to produce various goods and services. So individuals and governments invest in education. Health care enhances worker efficiency, so expenditure on preventive and curative health is an investment. Training updates skills and improves expertise. Information dissemination facilitates decision making. Costs incurred in migration also constitute an investment in human capital.

Individuals invest to increase earning capacity. Employers invest to increase workforce efficiency. The government invests to expand educational and health opportunities. The education sector in India has expanded from 2.23 lakh primary schools in 1950-51 with 19.15 lakh enrolments to 12.72 lakh primary schools with 198.9 lakh enrolments in 2014-15. Higher education institutions have also increased to about 665 universities and over 35,000 colleges now.

Human capital formation promotes economic development as educated and healthy people are more productive. However, India faces challenges like rising population, low quality education, insufficient training programs, brain drain and ineffective planning.

India must improve school infrastructure, aim for total literacy especially for females, reduce dropout rates, expand vocational training opportunities leveraging technology, improve health facilities, reform bureaucracy and regulations, develop infrastructure and promote human development. India can gain from the knowledge revolution by focusing on technology and skill development. Overall, India has realised the importance of investing in education and health but has a long way to go to fully develop its human capital.

Textual questions and answers

Multiple Choice Questions

1. Expenditure on immigration is also a source of human capital formation. This statement is

(a) Always true
(b) False
(c) Partly true
(d) Sometimes true

Answer: (a) Always true

2. In India, expenditure on education and health is the responsibility of:

(a) Union Government
(b) State governments
(c) Local governments (corporations, panchayats, etc.)
(d) all of the above

Answer: (d) all of the above

3. Which of the following statements is not false?

(a) Higher education takes a major share of the total educational expenditure in India.
(b) No education cess has been imposed by the government of India.
(c) Educational achievements in a country are indicated in terms of adult literacy level only.
(d) Expenditure per student at tertiary level is higher than that of elementary level of education.

Answer: (c) Educational achievements in a country are indicated in terms of adult literacy level only.

4. Structural composition refers to the ________ .

(a) number of people engaged in training
(b) number of people engaged in different sectors
(c) number of people engaged in tertiary sector
(d) number of people facing unemployment

Answer: (b) number of people engaged in different sectors

5. Identify the organisation, which is functioning as an apex organisation to provide quality school education.

(a) University Grants Commission
(b) Indian Council of Technical Education
(c) All India Council of Technical Education
(d) National Council of Educational Research and Training.

Answer: (d) National Council of Educational Research and Training.

6. The vaccination campaign for containing COVID-19 is an example of ________ medicine.

(a) Preventive
(b) Curative
(c) Social
(d) Emotional

Answer: (a) Preventive

7. Identify the incorrect statement in context of human capital:

(a) Human capital is intangible in nature.
(b) Human capital is perfectly mobile.
(c) Human capital is inseparable from its owner.
(d) Human capital cannot be sold in market like commodity.

Answer: (b) Human capital is perfectly mobile.

8. Which of the following is an example of preventive medicine?

(a) Vaccination
(b) Provision of clean drinking water
(c) Medical intervention during illness
(d) Spread of health literacy

Answer: (a) Vaccination

9. Read the following statements – Assertion (A) and Reason (R).

Assertion (A): Expenditure on migration is a source of human capital formation.
Reason (R): Migration to other countries involves the cost of transportation from one place to another and the higher cost of living in the migrated places.

Choose one of the correct alternatives given below–

(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
(b) Both Assertion (A) and Reason (R) are true but son (R) is not the correct explanation of Assertion (A).
(c) Assertion (A) is true but Reason (R) is false.
(d) Assertion (A) is false but Reason (R) is true.

Answer: (b) Both Assertion (A) and Reason (R) are true but son (R) is not the correct explanation of Assertion (A).

10. Read the following Statements – (1) and (2).

Statement 1: The emergence of Self-Help Groups (SHGs) ensured the reduction in the fissures of the formal credit system.
Statement 2: The borrowings from SHGs are mainly confined to consumption purposes by its members.

Choose one of the correct alternatives given below.

(a) Both 1 and 2 are true.
(b) 1 is true and 2 is false.
(c) 1 is false and 2 is true.
(d) Both 1 and 2 are false.

Answer: (a) Both 1 and 2 are true.

11. Read the following Statements – (1) and (2).

Statement 1: On-the-job trainings help to bridge a gap between theoretical concepts and practical experiences.
Statement 2: On-the-job trainings update the employees, with the latest changes in their work field.

Choose one of the correct alternatives given below.

(a) Both 1 and 2 are true.
(b) 1 is true and 2 is false.
(c) 1 is false and 2 is true.
(d) Both 1 and 2 are false.

Answer: (a) Both 1 and 2 are true.

Very Short-Answer Type Questions

1. What is physical capital?

Answer: Physical capital is the tangible assets such as machinery and equipment, buildings, etc. It can be separated from the owner as it is tangible.

2. What are the two ways to invest in health?

Answer: Investment in health involves provision of:

(i) Preventive health care such as vaccination and sanitised living conditions. It is such facilities that provide precaution against falling ill.

(ii) Curative health care such as treatment, drugs and medicines given by a doctor when a person feels sick or is infected with a disease.

3. Differentiate between Human Capital and Human Development.

Answer: The difference between Human Capital and Human Development is as follows:

(i) Human Capital: The productive investment embodied in human beings, such as in skills, abilities, health, etc. It is the factor(s) that will increase human productivity.

(ii) Human Development: Development that improves the condition of human beings. It is economic growth that fulfils the social obligations of growth by providing education, health care and improved quality of life for all.

4. Give any two sources of human capital formation.

Answer: Two sources of human capital formation are:

(i) Education: Expenditure on education is a major source of human capital formation. Education improves the ability to produce various goods and services.

(ii) Health: Expenditure on health is also an important source of human capital formation. A healthy worker generates more output than a sick or an unhealthy one.

5. Who invest in the formation of human capital in the economy?

Answer: Both individuals and the economy invest in these sources of human capital formation. Specifically:

(i) Individuals invest because they want to increase the earning capacity of themselves by spending on training programmes, knowledge-building exercises.

(ii) Employers of labour invest in education as they plan to increase the efficiency of their workforce.

(iii) The State or the government invests as it is also committed to the expansion of educational opportunities, health opportunities and skill development.

6. State two advantages of educating oneself.

Answer: Two advantages of educating oneself are:

(i) It enables you to increase your own efficiency.

(ii) It enables you to earn a livelihood.

7. Define human capital formation.

Answer: Human capital formation is the creation of human capital so that productivity of a human being may increase. Investment in education, health care, training and enrichment programmes, exchange of new developments, cultural growth and communication.

8. Name the four factors of production.

Answer: The four factors of production are land, labour, capital and entrepreneurship.

9. What is an NGO?

Answer: NGOs are privately operated social service bodies. These bodies are engaged in running non-formal education, in developing employment-oriented skills and in sensitising slum dwellers and the poor to live hygienically and to take care of their health.

10. Name the fastest developing sector to which the factors are shifting towards in recent years.

Answer: The services sector is the sector to which the factors are shifting towards. There is an explosive growth of the services sector, especially in the fields of financial services, information and communication technology (ICT), insurance, education and health.

Short-Answer Type Questions-I

1. Why should an economy promote women’s education?

Answer: An economy should promote women’s education because besides preparing one to earn a livelihood, education has far-reaching effects. It enables one to:

(i) increase own efficiency
(ii) know and understand the world one lives in
(iii) take informed decisions
(iv) work for the benefit of self and economy
(v) earn a livelihood
(vi) achieve a better status in social circle
(vii) understand the changing technology
(viii) make use of new inventions
(ix) create innovations.

2. What has been India’s performance with regard to provision of education and health?

Answer: India’s performance with regard to provision of education is as follows:

(i) Primary Education: In 1950-51, there were 2.23 lakh primary schools with only 19.15 lakh enrolments. However, in 2014-15, this number increased to 12.72 lakh primary schools with 1989 lakh enrolments.

(ii) Elementary Education: The enrolment ratio in one elementary school level education has also shown a drastic increase as the primary education level.

(iii) Secondary Education: In 1950-51, 7.4 thousand secondary education level schools were there with 15 lakh enrolments. In 2014-15, about 3.42 lakh schools were providing secondary education to 482 lakh students.

(iv) Higher Education: In India, about 665 Universities are providing higher education. There are about 35,829 colleges for general education and 11,315 colleges for professional and vocational education. The number of students in all these universities is about 2.5 crore.

However, as per the data, it has been observed that the per head availability of the existing facilities has been reduced drastically, because of which the quality of these available facilities has deteriorated and ultimately lowered the capacity to acquire specialised skills and knowledge.

3. Suggest certain reforms that India must undergo to improve future prospects in education sector.

Answer: The reforms that India must undergo to improve future prospects in the education sector are:

(i) A more than doubling of investment in education from the current level of 3.2 to 4.4 per cent of GNP. This is the soundest policy for quadrupling the country’s GNP per capita.

(ii) A comprehensive strategy to enhance the nation’s employable skills, including a cataloguing of the entire range of vocational skills required to support development.

(iii) Setting up good quality and better institutions for higher education.

(iv) A tremendous expansion of schools and classrooms will be required to support a quantitative and qualitative improvement in the country’s school system.

(v) Efforts are required to reduce the number of students per class to 20.

4. What is migration? What kind of costs are incurred in planning for migration?

Answer: Migration is the movement (especially of people as labour) from one place to another.

The costs incurred in planning for migration are:

(i) Cost of transport.

(ii) Housing of migrant population.

(iii) Increased use of an existing infrastructural facilities are all to be borne by the place to which a family migrates.

5. Give reasons for the government to invest in human capital formation.

Answer: The reasons for the government to invest in human capital formation are:

(i) The State or the government is committed to the expansion of educational opportunities, health opportunities and skill development.

(ii) Education and health are ‘public goods’ which are provided by the federal government.

(iii) Governments invest in education as it is the actual expansion of educational facilities that affects economic development.

6. How does one plan for human capital formation?

Answer: One plans for human capital formation by planning for investment in schools, colleges, research institutions, laboratories, hospitals, dispensaries, medicine manufacturing industries, transport, communications, clubs, libraries, museums and so many other related fields. The type of skill to be acquired has to be planned for. Educating cadres of people requires long-term planning and investment.

7. What has been India’s performance with regard to provision of education and health?

Answer: India’s performance with regard to provision of education is as follows:

(i) Primary Education: In 1950-51, there were 2.23 lakh primary schools with only 19.15 lakh enrolments. However, in 2014-15, this number increased to 12.72 lakh primary schools with 1989 lakh enrolments.

(ii) Elementary Education: The enrolment ratio in one elementary school level education has also shown a drastic increase as the primary education level.

(iii) Secondary Education: In 1950-51, 7.4 thousand secondary education level schools were there with 15 lakh enrolments. In 2014-15, about 3.42 lakh schools were providing secondary education to 482 lakh students.

(iv) Higher Education: In India, about 665 Universities are providing higher education. There are about 35,829 colleges for general education and 11,315 colleges for professional and vocational education. The number of students in all these universities is about 2.5 crore.

However, as per the data, it has been observed that the per head availability of the existing facilities has been reduced drastically, because of which the quality of these available facilities has deteriorated and ultimately lowered the capacity to acquire specialised skills and knowledge.

Short-Answer Type Questions-II

1. Highlight the importance of training and information in development of human capital.

Answer: Expenditure on training is undertaken to enhance the employee’s efficiency. This is also known as in-service training. It keeps the workers well-informed, updates their skill and improves their expertise while motivational workshops recharge them to work better. Expenditure on training is thus a source of human capital formation as it improves human efficiency to work.

Regarding information, an economy has to have an efficient system for the dissemination of information. A well-developed information system facilitates human capital formation. The more easily is such information made available, the better and faster will be the formation of human capital.

2. Establish the need for expenditure on information relating to health and education in order to effectively utilise human resources.

Answer: Expenditure on information is needed because people need to know of the best and the latest opportunities, such as studying a certain combination of subjects or attending various education fairs. All this is known as collection of information. A well-developed information system facilitates human capital formation. The more easily is such information made available, the better and faster will be the formation of human capital.

Additionally, availability of information regarding health care and nutrition is a contributing factor for a better human capital and economic development. Therefore, all expenditure incurred in creation, collection and dissemination of information is a source of human capital formation.

3. Why should education of women be given importance in India?

Answer: India has to go a long way in achieving the educational attainment of 100 per cent literacy, especially of the girl child. Besides preparing one to earn a livelihood, education has far-reaching effects. It enables one to increase efficiency, know and understand the world you live in, take informed decisions, work for the benefit of self and economy, earn a livelihood, achieve a better status in your social circle, understand the changing technology, make use of new inventions and create innovations.

Special arrangements have been made for adult and female education. A separate Women Education Council has been set up in order to provide technical education to women. Many women polytechnics have also been established.

4. Relate human capital with economic development.

Answer: Human beings are both the end and the means to economic development. Economic development is for the people. It must provide them with better, fuller and more secure life. On the other hand, economic development is dependent on the people, their capacity and active participation in increased production of goods and services and by their savings and investment in the future.

Improvements in food, education, health, housing and environment are important as they not only contribute directly to a better life, but also increase the productivity of labour, and create an environment that increases production and enhances the quality of life. This creates a sense of well-being in the economy wherein people participate in the process of development.

5. Discuss the future prospects for India in improving its educational attainment.

Answer: India has to go a long way in achieving the educational attainment of 100 per cent literacy, especially of the girl child. Higher education has also to improved by setting up good quality and better institutions. A tremendous expansion of schools and classrooms will be required to support a quantitative and qualitative improvement in the country’s school system.

In order to achieve the best-case scenario, total school enrolment would have to increase by 75 million or 44 per cent. This will require a proportionate expansion in the number of classrooms. In addition, efforts are required to reduce the number of students per class to 20.

Long-Answer Type Questions-I

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

Answer: Investment in human capital contributes to growth because the more and better we educate ourselves, the greater is our efficiency in whatever we choose to do and the more we can earn and contribute towards economic growth. If human resources are well planned so as to provide education, skills, health information and migration, the resultant human capital contributes by accelerating economic growth and development.

Improvements in food, education, health, housing and environment are important as they not only contribute directly to a better life, but also increase the productivity of labour, and create an environment that increases production and enhances the quality of life. This creates a sense of well-being in the economy wherein people participate in the process of development.

2. There is a downward trend in inequality world-wide with a rise in the average education levels. Comment.

Answer: Education enhances the earning capacity of individuals. It is a known fact that an educated person earns more than an uneducated one because education improves efficiency and productivity. By studying the knowledge amassed by experts and learning skills, one can improve their efficiency to work.

When average education levels rise, a larger section of the population acquires the skills and knowledge necessary to participate effectively in the economy. This enables more people to secure better jobs and earn higher incomes. As the income-generating capacity of the general population increases through education, the gap between the rich and the poor narrows. Therefore, the rise in education acts as an equalizer, leading to a downward trend in inequality.

3. Argue in favour of the need for different forms of government intervention in education and health sectors.

Answer: The need for different forms of government intervention in education and health sectors arises because education and health are ‘public goods’ which are provided by the federal government at all the three levels, namely central, state and local levels in India. Governments also invest in education as it is the actual expansion of educational facilities that affects economic development. So, the State opens schools, colleges, universities, vocational training institutes and research centres.

The State or the government invests as it is also committed to the expansion of educational opportunities, health opportunities and skill development. Health, sanitation and hygiene and provision of safe drinking water, timely dissemination of information and decentralised urbanisation are some of the critical areas in which the government has to invest for a better human capital.

Besides, the private sector also produces these services. Since it is profitable to provide these services, it is imperative that this sector be guided and regulated by the government in order to monitor the quality.

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

Answer: The indicators of educational achievement in a country include:

(i) Primary Education: The expansion of primary education and the number of primary schools.
(ii) Elementary Education: The enrolment ratio in elementary school level education.
(iii) Secondary Education: The number of secondary education level schools and enrolment of students.
(iv) Higher Education: The number of Universities providing higher education, colleges for general education and professional and vocational education, and the number of students in these universities.
(v) Adult Female Education Ratio: The arrangements made for adult and female education.
(vi) Literacy: The literacy rates achieved through campaigns such as the National Literacy Mission.
(vii) Enrolment and Drop-out rates: As depicted in education scenarios, the primary, elementary, and secondary enrolment rates, along with the drop-out rates at different levels.

5. Discuss the following as a source of human capital formation: (a) Health infrastructure (b) Expenditure on migration

Answer: The discussion on the sources of human capital formation is as follows:

(a) Health infrastructure: A healthy worker generates more output than a sick or an unhealthy one. Seen this way, expenditure on health is also an important source of human capital. This involves provision of preventive health care such as vaccination and sanitised living conditions. It is such facilities that provide precaution against falling ill. It also involves curative health care such as treatment, drugs and medicines given by a doctor when a person feels sick or is infected with a disease. Setting up medical care units or hospitals is an important source of this type of expenditure. Since investment in health improves the efficiency of workers, it is a major source of human capital formation.

(b) Expenditure on migration: People migrate within and outside the country in search of better jobs. Expenditure on such a movement is another source of human capital formation. Cost of transport, housing of migrant population, increased use of an existing infrastructural facilities are all to be borne by the place to which a family migrates. Thus, all expenditure incurred by labour in moving from one place to another for better education and work is a source of human capital formation.

6. Bring out the need for on-the-job-training for a person.

Answer: The need for on-the-job-training for a person arises because expenditure on training is undertaken to enhance the employee’s efficiency. This is also known as in-service training. It keeps the workers well-informed, updates their skill and improves their expertise while motivational workshops recharge them to work better.

Expenditure on training is thus a source of human capital formation as it improves human efficiency to work. By studying the knowledge amassed by experts and by learning skills or what we term as training, we can improve our efficiency to work.

7. What are the main problems of human capital formation in India?

Answer: The main problems of human capital formation in India are:

(i) Increasing Population: Increasing population is adversely affecting the economic growth of India by directly affecting the human capital. As per the data, it has been observed that the per head availability of the existing facilities has been reduced drastically, because of which the quality of these available facilities has deteriorated and ultimately lowered the capacity to acquire specialised skills and knowledge.

(ii) Low Academic Education: There are a number of Universities and Boards available in India. However, the irony is that most of these universities supply the inefficient education level which does not ensue any addition of skillful labour force.

(iii) Insufficient Training Programmes: Agriculture is the backbone of Indian economy but is deprived of professional skills which are essential for a higher level of productivity. Even till now, many farmers are using traditional agricultural techniques due to lack of any knowledge and training programmes.

(iv) Migration: Migration of skilled and educated labour to other countries is a serious threat to the process of capital formation in India. This problem of migration of educated and skilled labour to other countries is known as Brain-drain.

(v) Ineffective Planning: No efforts have been made to maintain the balance in the labour market. Therefore, India is facing the problem of excess supply of unskilled labour and no supply of skilled labour in the economy.

Long-Answer Type Questions-II

1. Explain any four challenges in the formation of human capital in India. (2023)

Answer: India recognises the importance of Human Capital Formation in the context of economic development. However, there are some serious problems in the process of human capital formation which are discussed below:

(i) Increasing Population: Increasing population is adversely affecting the economic growth of India by directly affecting the human capital. As per the data, it has been observed that the per head availability of the existing facilities has been reduced drastically, because of which the quality of these available facilities has deteriorated and ultimately lowered the capacity to acquire specialised skills and knowledge.

(ii) Low Academic Education: There are a number of Universities and Boards available in India. However, the irony is that most of these universities supply the inefficient education level which does not ensue any addition of skillful labour force.

(iii) Insufficient Training Programmes: Agriculture is the backbone of Indian economy but is deprived of professional skills which are essential for a higher level of productivity. Even till now, many farmers are using traditional agricultural techniques due to lack of any knowledge and training programmes.

(iv) Migration: Migration of skilled and educated labour to other countries is a serious threat to the process of capital formation in India. This problem of migration of educated and skilled labour to other countries is known as Brain-drain.

2. How has India fared in the provision of health and education to its people? Support your answer with a brief description of the programmes initiated by the government.

Answer: India has realised the importance of provision of education and health facilities. Education and health are ‘public goods’ which are provided by the federal government at all the three levels, namely central, state and local levels in India. You must have come across Central schools, State-level schools and schools run by local bodies such as the Municipality schools and Shiksha Parishad schools in India.

The Ministry of Education itself changed its name to Ministry of Human Resource Development (MHRD) to accommodate the fast changing educational requirements of the country. Besides, to buffer the education system from undue political pressures, autonomous bodies such as the National Council for Educational Research and Training (NCERT), the University Grants Commission (UGC) and the National Council for Technical Education (NCTE) for the education sector and the Indian Council for Medical Research (ICMR) for the health sector have been formed.

The following are the observations so far in the growth of education sector in India:

(i) Primary Education: Primary education is the basic of general education. In the Five-Year Plans, expansion of primary education is always promoted by the campaign of “Education for All”, i.e. a large proportion of population must achieve the basic primary education level.

(ii) Elementary Education: This is the education level from class 1 to class 8. The enrolment ratio in one elementary school level education has also shown a drastic increase as the primary education level.

(iii) Secondary Education: The Government took initiative to increase the enrolment of students by opening many more central and government schools which provide day meal facilities, stationery, books, and uniforms to all the students.

(iv) Higher Education: In India, about 665 Universities are providing higher education. There are about 35,829 colleges for general education and 11,315 colleges for professional and vocational education.

(v) Adults Female Education Ratio: Special arrangements have made for adult and female education. Separate Women Education Council has been set up in order to provide technical education to women. Many women polytechnics have also been established.

(vi) Campaigns for Literacy: The Government has started many total literacy campaigns. National literacy Mission was launched to render literacy for everyone in the economy. Further more, it was converted into “Saakshar Bharat” with central forms on female education. It covers all age groups of 15 and above.

3. Discuss the various sources of human capital formation.

Answer: Human capital formation occurs with investment in education, health-care, training and enrichment programmes, exchange of new developments, cultural growth and communication. An economy needs to plan for investment in schools, colleges, research institutions, laboratories, hospitals, dispensaries, medicine manufacturing industries, transport, communications, clubs, libraries, museums and so many other related fields. It is the investment in these areas that becomes the source for human capital. Some of the important sources of human capital formation are:

(i) Education: Education improves the ability to produce various goods and services. This is why people invest in it. Individuals invest in education as it increases their future incomes. Governments also invest in education as it is the actual expansion of educational facilities that affects economic development. So, the State opens schools, colleges, universities, vocational training institutes and research centres. Expenditure on education is thus a major source of human capital formation.

(ii) Health: A healthy worker generates more output than a sick or an unhealthy one. Seen this way, expenditure on health is also an important source of human capital. This involves provision of:

• Preventive health care such as vaccination and sanitised living conditions. It is such facilities that provide precaution against falling ill.
• Curative health care such as treatment, drugs and medicines given by a doctor when a person feels sick or is infected with a disease. Setting up medical care units or hospitals is an important source of this type of expenditure. Since investment in health improves the efficiency of workers, it is a major source of human capital formation.

(iii) Training: Expenditure on training is undertaken to enhance the employee’s efficiency. This is also known as in-service training. It keeps the workers well-informed, updates their skill and improves their expertise while motivational workshops recharge them to work better. Expenditure on training is thus a source of human capital formation as it improves human efficiency to work.

(iv) Information: All this is known as collection of information. An economy has to have an efficient system for the dissemination of information. A well-developed information system facilitates human capital formation. The more easily is such information made available, the better and faster will be the formation of human capital.

(v) Migration: People migrate within and outside the country in search of better jobs. Expenditure on such a movement is another source of human capital formation. Cost of transport, housing of migrant population, increased use of an existing infrastructural facilities are all to be borne by the place to which a family migrates. Thus, all expenditure incurred by labour in moving from one place to another for better education and work is a source of human capital formation.

Additional/extra questions and answers

1. Why is there a strong emphasis on education for future generations?

Answer: We want our generations to be better educated because the more and better we educate ourselves, the greater is our efficiency in whatever we choose to do and the more we can earn and contribute towards economic growth. On an average, an educated person earns more than an uneducated one.

29. Discuss in detail the various sources of human capital formation. How do they contribute to an individual’s and the economy’s growth?

Answer: Human capital formation involves all aspects that increase the productive capacity of humans, such as the size of the population and their education, efficiency, level of scientific development, cultural values, and social and political institutions. The important sources of human capital formation are education, health, on-the-job training, market information, and migration.

(i) Education: Education improves the ability to produce various goods and services. Individuals invest in education because it increases their future incomes. Governments also invest in education as the expansion of educational facilities affects economic development. By studying the knowledge amassed by experts and by learning skills, we can improve our efficiency to work. The more and better we educate ourselves, the greater is our efficiency in whatever we choose to do and the more we can earn and contribute towards economic growth. Expenditure on education is thus a major source of human capital formation.

(ii) Health: A healthy worker generates more output than a sick or an unhealthy one. Expenditure on health is an important source of human capital and involves the provision of preventive health care, such as vaccination and sanitised living conditions, and curative health care, such as treatment and medicines. Since investment in health improves the efficiency of workers, it is a major source of human capital formation.

(iii) Training: Expenditure on training is undertaken to enhance an employee’s efficiency. This is also known as in-service training. It keeps workers well-informed, updates their skills, and improves their expertise. Expenditure on training is thus a source of human capital formation as it improves human efficiency to work.

(iv) Information: An economy needs to have an efficient system for the dissemination of information. A well-developed information system facilitates human capital formation. The more easily such information is made available, the better and faster will be the formation of human capital. All expenditure incurred in the creation, collection, and dissemination of information is a source of human capital formation.

(v) Migration: People migrate within and outside the country in search of better jobs. Expenditure on such a movement is another source of human capital formation. The cost of transport, housing for the migrant population, and increased use of existing infrastructural facilities are all to be borne by the place to which a family migrates. All expenditure incurred by labour in moving from one place to another for better education and work is a source of human capital formation.

Additional/extra MCQs

1: According to Michael P. Todaro, human capital refers to the productive investment embodied in human persons, which includes:

A. Machinery, equipment, and buildings
B. Land, labour, and entrepreneurship
C. Skills, abilities, ideals, and health
D. Financial assets and stocks

Answer: C. Skills, abilities, ideals, and health

30: (I) Human beings are the active agents who accumulate capital and exploit natural resources.
(II) Capital and natural resources are the passive factors of production.

A. I is a contradiction of II.
B. II is the cause of I.
C. I and II are complementary statements explaining the roles of different factors of production.
D. I is an example of II.

Answer: C. I and II are complementary statements explaining the roles of different factors of production.

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