ECON 214 Principles Of Macroeconomics System

Human capital is acknowledged as the skilled labour force, who is productive in nature to add values and output to the existing product stock (Fitzsimons, 2015). There is difference between human capital and total number of workers available for work in the market because, it may so happen that all the workers available in the workforce may not be skilled and unless they are not skilled they cannot be called human capital (Bidwell et al. 2015).

Three ways to increase human capital are as follows (Lutz, Butz & Samir, 2017):

1. Enhancing education quality to increase participation rate
2. Introducing vocational training for increasing marginal productivity
3. Rise in investment through investing in infrastructure to increase the demand of the skilled labour

Yes, it is true that an increase in labour force can lead to increase in human capital because with rise in labour force, there will be availability of more skilled labour in market (Ehrenberg & Smith, 2016). It will lead to rise in the number of skilled labour available. However, there is also possibility that though there is rise in labour force, all of the new labours are unskilled in nature. In this scenario, there will be no rise in human capital though there will be rise in overall labour force.

Rule of 70 argues that to find the number of years of doubling of an invested amount, 70 must be divided by the rate of return (Donnermeyer, 2015). Applying this rule to the given data, years of doubling is as follow:

Rate of return is 2%

Applying rule of 70 = (70/2) = 35

Therefore, it would take 35 years to double the savings account amount.

Rate of return is 5%

Applying rule of 70 = (70/5) = 14

Therefore, it would take 14 years to double the mutual bond fund.

Rate of return is 7%

Applying rule of 70 = (70/7) = 10

Therefore, it would take 10 years to double the stock market mutual fund.

According to modern economic theories, three sources of economic growth are as follows (Gilpin, 2016):

1. Natural resource – for instance fossil fuel, gold, silver etc.
2. Physical capital – for instance factories, roads etc.
3. Human capital – for instance skilled labour like teachers, doctors, lawyers etc.

Investment in capital is essential for growth of an economy; however, investing only in capital is not a solution for sustainable growth. Investing only in capital is not a good option while there are other two fronts of the three sided spectrum of economic development (Stiglitz, 2016). In addition to this with rise in investment in capital, there will be diminishing marginal products which will cause in reduction of return with rise in investment of each unit of capital (Rognlie, 2016).

Investing in capital needs huge amount of money as well as natural resource, it may so happen that the economy can get dried up. Rigorous investment in capital will cause scarcity of money for money and natural resource too, which will ultimately lead in loss of productivity (Murphy & Topel, 2016). On the other hand, if there is investment only in capital, then not only the labour market besides this land being one of the most important factors of production will also catch up to its limit. Lack of labour to employ and land to build further capital will hamper the productivity of the country and it will cause reduction in economic output of the nation.

Reference:

Bidwell, M., Won, S., Barbulescu, R., & Mollick, E. (2015). I used to work at Goldman Sachs! How firms benefit from organizational status in the market for human capital. Strategic Management Journal, 36(8), 1164-1173.

Donnermeyer, J. F. (2015). Doubling time and population increase of the Amish.

Ehrenberg, R. G., & Smith, R. S. (2016). Modern labor economics: Theory and public policy. Routledge.

Fitzsimons, P. (2015). Human capital theory and education. In Encyclopedia of educational philosophy and theory (pp. 1-4). Springer Singapore.

Gilpin, R. (2016). The political economy of international relations. Princeton University Press.

Lutz, W., Butz, W. P., & Samir, K. E. (Eds.). (2017). World Population & Human Capital in the Twenty-First Century: An Overview

Murphy, K. M., & Topel, R. H. (2016). Human capital investment, inequality, and economic growth. Journal of Labor Economics, 34(S2), S99-S127.

Rognlie, M. (2016). Deciphering the fall and rise in the net capital share: accumulation or scarcity?. Brookings papers on economic activity, 2015(1), 1-69.

Stiglitz, J. E. (2016). How to restore equitable and sustainable economic growth in the United States. American Economic Review, 106(5), 43-47.

Webb, I., & Martin, G. (2017). The effect of banking and insurance on the growth of capital and output.