Previous Year Question
Consider the following statements. Human capital formation as a concept is better explained in terms of a process which enables
individuals of a country to accumulate more capital.
increasing the knowledge, skill levels and capacities of the people of the country.
accumulation of tangible wealth.
accumulation of intangible wealth.
Which of the statements given above are correct?
1 and 2
2 only
2 and 4
1, 3 and 4
Correct Answer: C
Detailed Solution
Human capital represents the stock of education, knowledge, skills, health, experience, efficiency and productive capabilities embodied in people. Expenditure on education, training, healthcare, migration and employment-related information is treated as investment in human capital because it can raise future productivity and income.
Statement 1 is incorrect.
The accumulation of additional money, machinery, land or financial capital by individuals does not define human capital formation. Human capital formation increases the productive capabilities embodied in a person; it does not necessarily involve accumulation of physical or financial capital.
Statement 2 is correct.
Education, skill development, on-the-job training and better health increase an individual’s knowledge, skills, working capacity and productivity. This is the central purpose of human capital formation.
For example, training a technician to operate modern machinery does not increase the number of machines, but it increases the technician’s capacity to use the available machinery efficiently.
Statement 3 is incorrect.
Buildings, machinery, tools and equipment constitute tangible wealth. Their creation is described as physical capital formation, not human capital formation.
Statement 4 is correct.
Knowledge, skills, health, experience and competence cannot be physically seen or touched, but they enhance productivity and future earning capacity. Human capital is therefore treated as intangible wealth.
Important characteristics of human capital include:
It cannot be separated from its owner and independently sold or transferred.
It is created through investment in education, health and training.
It increases labour productivity, innovation and earning capacity.
By making workers more efficient, it can also increase the productivity of physical capital.