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Human Capital Formation
In economics, physical capital or just 'capital'
refers to a factor of production (or input into
the process of production), such as machinery,
buildings, or computers.
Financial Capital refers to the stocks/shares of
the companies, or these are simply financial
claims against assets of the companies. Financial
Capital consists of titles of ownership of
“Human Capital Formation is the process of acquiring and increasing
the number of persons who have the skill, education and experience
which are essential for the economic and political development of a
country.” - G.M. Meier
Physical Capital Human Capital Financial Capital
Physical Capital refers
to stock of produced
means of production.
It consists of machines,
besides the stock of tools
and implements. An
of physical capital is
that it consists of man-
made things which are
used for further
Human capital refers to
the stock of ‘skill and
expertise’ of a nation at a
point of time.
It is the sum total of skill
and expertise of engineers,
doctors, professors and
workers of all types who
are engaged (or have the
capacity and expertise to be
engaged) in the process of
refers to the
stocks/shares of the
companies, or these are
simply financial claims
against assets of the
consists of titles of
ownership of physical
Determinants/Sources of Human
Expenditure on Education:
Expenditure on Education is the most
effective way of enhancing and enlarging
a productive workforce in the country.
It is therefore a very important
determinant of human capital formation.
Monetary benefits of education(in terms of
earnings of the educated person during his
life time) far exceed the cost of education.
The difference between benefit and cost is
an approx. market value of human capital
On-The- Job Training:
On-The- Job Training helps workers
to hone their specialized skills. It
enables them to raise the level of their
efficiency/productivity. Firms are
always inclined to undertake ‘on-the
job-training’ programmes. Because,
returns(on account of enhanced
productivity) far exceed the cost of such
programmes. Expenditure on such
training programmes, therefore, is yet
another important determinant(and a
source) of human capital formation.
Difference between Human
Capital & Human
Human Capital Human Capital Development
Human capital is a
means to an end. Human
capital is a means in the
sense that it consists
of ‘skills’ as used in the
process of production.
It consist of ‘know-
how’, abilities and
expertise used as input.
productivity is the end
Human development is an end
itself. It refers to development
of the individuals as valuable
personalities by acquiring good
education and attaining good
health. Human development
occurs when more and more
individuals in a society are
educated, healthy and skill-
Role of Human Capital Formation
Or Human Capital Formation &
Following observations highlight how human capital formation
contributes to the process of growth and development:
Change in Emotional & Material Environment
Human Capital formation generates a change in emotional and
material environment of growth. Emotional environment
becomes conductive to growth as people tend to acquire
growth-oriented attitude and aspirations. Material
Environment becomes helpful to growth as the society now
possesses higher number of skilled and trained workers to
implement the plans and programmes of economic growth.
Higher Productivity of
Human Capital formation increases
productivity of physical
capital(referring to output per
unit of capital). Specialized
engineers and skilled workers can
certainly handle machines better
than the others. It enhances
productivity and accelerates the
pace of growth.
Human Capital formation
facilitates innovations, the
undercurrent of growth
and development. Larger
the number of skilled and
trained personnel, greater
the possibilities of
innovations in the area of
production and related
activities. Innovation is the
life-line of growth.
Higher Rate of Participation And Equality:
By enhancing productive capacities of the labour force,
human capital formation produces greater employment.
This increases the rate of participation. Higher the rate of
participation, greater is the degree of economic and social
equality in the society. Higher the rate of participation
and higher degree of equality are pointers to growth with
social justice, called ‘development’.