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Question

How does investment in human capital contribute to growth?

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Solution

Investment in human capital is positively related to economic growth. The contribution of human capital formation to economic growth can be explained as follows:

(i) Increase in Labour Productivity

Investment in human capital through expenditure on education, health, etc enhances the productivity of labour as they become physically fit and skilled at their jobs. It leads to efficient utilisation of the material inputs and capital. With an increase in productivity, output increases at an increasing rate and hence economic growth accelerates.

(ii) Innovations

Human capital formation helps in preparing learned scientists and researchers in various subjects who bring out innovative products, technologies, and processes and thus add to economic growth.

(iii) Capacity to Adopt:

Advanced technology can be adopted only if the skills and knowledge required for using that technology are present in the country. Investment in education and on-the-job training helps to impart these skills and enhance the knowledge base and thus helps in the absorption of new technologies which leads to higher production and thus economic growth. Thus it is evident that human capital contributes to economic growth in various ways.


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