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Human capital: Dynamics and Convergence

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Eda Deniz Özdemir

on 11 November 2014

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Transcript of Human capital: Dynamics and Convergence

Human capital: Dynamics and Convergence
1. What is "The Human Capital"?

2. Can we measure "The Human Capital"?

3. What are the Solow model's problems?

4. Why did they add "Human Capital" into the equation?

5. Results
When we say capital accumulation on development economics, usually some developments at physical capital like machines, factories and buildings come to mind. But economics have another capital, which called
human capital.
1. What is the "Human Capital"?
The most commonly used indicators about human capital are the indicators about education, health and migration. '
' has a private importance in these indicators for human capital, because measure the others is difficult.
2. Can We Measure The Human Capital?
As the result, we can say that: We must add human capital to model because it has an important addition to revenue and it makes strong physical capitals and population effects.
Jim Saxton:
The skills and knowledges which have won by people for redound their values at labour market.

Human capital notion includes the skills, knowledges and the other qualities which have been formed at inviduals about economic activities.
For example
, Mankiw-Romer-Weil model, human capital investments are accepted as investments for education and some factors (like investments for health) are excluded. Representation for human capital, the students who registered to secondary educations rate to active population has been accepted.

Here the accepted matter as human capital investments is the revenue, salary which was given up for school education. That means
opportunity cost
of continuing to education.

Out of the active population (15-60 ages) people have
two options

They will start working for minimum salary level


They will continue their education because of hope higher revenue on the future.

So, at this age continuing to educations oppurtiny cost is minimum salary and it shows us human capital investments.
For Mankiw, Romer and Weil (1992), Solow model is an important idea about economic development theory.
Solow model
says: 'Saving and population growth influence development. And the differences of revenues between the countries can be explained by these two factors.' And
they agree this.
3. What are the Solow Model's problems?
1. Revenue differences shown by Solow model are less than the real.

2. Convergence rates supposed by Solow model are higher than convergence rates done by a lot of other empirical works.

3. Factor returns between countries shows more differences than the empirical ones.

1. High saving rates or low population growth is a reason for higher revenue quantities and higher human capital reserve. Because revenue will be used for human capital investment as well as physical capital investment and consumption.

2. Saving and population and related to human capital, so, without adding human capital to model as illuminating factor, saving and population parameters will be affected.

4. Why did they add Human Capital into the equation?
Mankiw, Romer and Weil, advocate that: The capital which stated like a production factor (K), wasn't under debate correctly, because Solow has used the capital (K) to mean
just physical capital.

So, outputs' part which hasn't consumed yet, is used for consumed physical capital, and the other part increase capital reserve.

But Mankiw, Romer and Weil model advocate that: the outputs part which hasn't consumed yet isn't used for just physical capital and it is used for human capital as well as physical capital.
So outputs part which hasn't consumed yet can be used for increase the human capital reserve and duration as well as for physical capital.

As a result,
output is used for human capital as well as consumption and physical capital investment.
Developed by Mankiw, Romer and Weil model, is an aspect of Solow model which has been added human capital to physical capital and labour, which putatived as production factors.

Include the human capital to model, can be shown clearly by helping a production function the type of Cobb-Douglas.
For Mankiw, Romer and Weil, if the economies have different saving rates and different population growth rate; they will have their own stable balance and their own revenues per head. Because of that, their differences about revenues are stabil.

Convergence process
is connected by countries' amounts of production factor at first. Researchers who use constant return to scale, says that: 'Human capital is one of the factors which explain the revenue differences and converenge between the countries.'.

For these researchers, neo-classic development model isn't completely successful. They say: 'But if we consider human capital and we accept the differences of saving rates between the countries; this model is enough for explaining the differences about developments.'

On their models (MRW) the returns are produced by physical and human capital and labour, and the returns are used for physical and human capital investment and consumption.

According to these researchers, when human capital have been included to this model, % 80 of the differences of the countries developments can be explained.

Plus, according to these researches, human capital is an important factor for economic development and growth; and without human capital, we can't know differences of countires' revenues and practical convergence rates.

As the result,
we can say that:
We must add human capital to model because it has an important addition to revenue and it makes strong physical capitals and population effects.
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