CBSE Class 12-commerce Answered

Human capital is believed to be positively related to economic growth however it is difficult to establish a relation of cause and effect from the growth of human capital to economic growth. But the relationship between human capital formation and economic growth can be traced with the following observations:

1. Increase in Labour Productivity:

Investment, in human capital through expenditure on education, health, training etc., enhances the productivity of labour as they become physically fit and skilled in their jobs. This leads to efficient utilisation of the material inputs and capital.With increase in productivity output increases which accelerates the pace of economic growth.Thus the educated, healthy and trained population itself become an asset in accelerating economic growth.

2. Higher Productivity of physical capital:

Human capital formation increases the productivity of the physical capital as it is known that only a person who is trained and the knowledge of using machines such as specialized engineers and skilled workers can enhance their productivity of the physical capital.

3. Facilitates Innovation:

Human capital formation facilitates innovations by discovery of new technology or creation of new products. It helps scientists and researchers in various subjects who bring out innovative products, technologies and processes and thus, add to the economic growth.

4. Higher rate of participation:

By enhancing the productive capacity of people, human capital formation induces employment. This leads to increase in the number of people participating in the production process.Higher rate of participation leads to social and economic equality in the society.