Capital Formation And Economic Growth

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Capital Formation And Economic Growth



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Lecture 9: Growth, Output, and Capital Accumulation - Intermediate Macroeconomics

Sources of Human capital formation 1 Expenditure on Education Investment in education is considered the main source of human capital formation. Education is the process of teaching, learning, and training especially in schools or colleges to improve knowledge and develop skills. Education; Confers higher-income capacity on people. Provides knowledge to understand the changes taking place in society. Stimulates invention and innovation. Facilitates adoption of new technologies.

Expenditure on Education is a way of enhancing and enlarging a productive workforce in a country. The Labour skill of an educated person is more than an uneducated person because education generates technical skills and creates manpower that is suited for improving labor productivity. Spending on education by individuals is similar to spending on capital goods by companies to increase future profit over some time. The difference between the benefit and cost of education measures the market value of human capital formation. Expenditure of Health includes; Preventive medicine vaccination Curative medicine during illness Social medicine spreading of health literacy Provision of clean drinking water Good sanitation facilities Poor health and underemployment adversely affect the quality of manpower because sick labor, without access to medical facilities, is forced to abstain from work, which causes loss in productivity.

On the other hand, adequate food and proper nourishment to people along with adequate health and sanitation facilities lead to improvement of quality of human capital. Health expenditure directly increases the physical and mental ability of human beings and produces a healthy labor force and thus, it is an important source of human capital formation. Workers may be sent for off-campus training. On job training Enable workers to absorb new technology and ideas.

Help workers to enhance their specialized skills. Help workers acquire new technological skills. It increases the skills and efficiency of the workers and further leads to an increase in production and productivity. The return of expenditure on such training in the form of enhanced labor productivity is more than the cost of it. Unemployed people from rural areas migrate to urban areas in search of jobs leading to utilization of inactive skills and technically qualified persons like doctors, engineers, etc. Migration involves the cost of transportation and cost of living in the migrated place but increased earnings at the new place outweigh the cost of migration. Thus, migration is a source of human capital formation as it facilitates the utilization of inactive skills and fuller utilization of skills.

For example, the level of Salary is associated with various types of jobs so that they can choose the right job. Or, educational institutions which are providing the right type of educational skill, their standard, and cost, etc. This kind of information is necessary to make decisions regarding investment in education as well as for efficient utilization of the acquired skills and enable people to actualize their productive potential. Thus, expenditure on acquiring all sorts of information regarding labor markets and other markets like education and health is also a source of human capital formation.

Problems faced by human capital formation Insufficient resources Rising population Brain drain- Skilled and educated persons who have high caliber when migrating to developed countries in search of better job opportunities. Lack of proper manpower planning. Insufficient on the job training in the agricultural sector Physical and human capital — Human Capital Formation Class 12 Notes Physical Capital Human capital It refers to man-made means of production or all those inputs which are required for production like machines, buildings, etc.

Human capital refers to the stock of skill, ability, expertise, education, and knowledge embedded in the people of a nation at a point in time. It is tangible and can be sold in the market It is intangible and cannot be sold in the market; only the services of human capital are sold. It is separable from its owner. It is inseparable from its owner. Depreciates over time due to continuous use or due to change in the pattern of demand and technology. It generally depreciates with aging but depreciation can be reduced with continuous investment in health and education. It is completely mobile between countries It is less mobile between countries as compared to physical capital It creates only private benefit It creates both private and social benefits It represents the productive capacity of a nation Human capital is the cause behind physical capital.

Human capital formation and Economic growth — Human Capital Formation Class 12 Notes Casualty between human capital formation and economic growth flows in either direction. That is, higher income causes the building of a high level of human capital and vice-versa,i. Human capital is important in many ways; It makes the efficient use of physical capital stimulates higher productivity and production. As a result, the current study assumes that changes in demographic structure exert potentially effects on national saving. The current study theorizes the effect of demographic dynamics on savings and capital formation in an aging economy. Taking into account the effects of population dynamics, saving, and capital formation together, this effort allows us to go one step further in examining the implications of population aging for economic growth.

This revision of age-related saving behavior would allow us to analyze the effect of population aging on aggregate savings and per capita income. Consider a simple closed economy with no government that all output is either used for consumption or investment. The national income identity is. Investment is used to create new units of physical capital or to replace old, worn-out capital. Subtracting from both sides of the national income identity, one obtains national saving:. In equilibrium, the amount saved equals to the amount invested. Investment makes new injection to existing capital stock whereas depreciation wipes out a certain portion of existing capital.

Savings finance investment projects so that the amount of capital accumulation is determined by proportion of income saved; that is, the saving rate s. At any given level of income, higher saving rate implies higher saving and investment. Assume that aggregate output is a function of technology, physical capital, and labor with a standard Cobb-Douglas aggregate production function of constant returns to scale:. The input factors, and , represent physical capital and labor, respectively. Economic growth is determined by the growth of three elements: technological progress A , physical capital and labor input.

Assume population grows at a constant rate of n and labor grows at the same rate as aggregate population. Technological advancement as well as increase in physical capital and labor inputs raises production productivity. Define k as the stock of physical capital per unit of labor and as the level of output per unit of labor. One can re-write 1 in terms of output per capita and yields 3. Taking natural logarithms of 2 and calculating the first difference, one obtains growth rate of output per capita:. Equation 3 shows that the growth rate of GDP per capita is determined by the growth rate of technological progress and the product of output elasticity of capital and the growth rate of physical capital per labor.

Figure 2 illustrates the profile of income and expenditure of the average household at different ages in The figures shown in Figure 2 are yearly average of monthly income and disbursements per household of various age groups in , which is adopted from Japanese Family Income and Expenditure Survey of Two-or-more-person Households. That is, both income and expenditure are hump-shaped which increase with ages up to age 55 and decline thereafter. A young representative household. Figure 2. Monthly income and expenditure per household head by age groups in As age increases earning capability increases and expenditure increases as well.

Both income and expenditure series show an increasing trend up to age 55 and drop after age 55 - For people with old age, though both income and expenditure decreased, expenditure shows a smoother scenario than scenario of income. This scenarios difference is due to the Japanese job market convention and public pension provision. In the post-WWII era, the conventional retirement age in Japan is 55 and the government pension provision starts at age As a result, many retirees are forced to search for various kinds of works to earn provisional income to cover the income shortage in this 5-year gap.

Due to this institutional factor, income drops sharply for Japanese people aged 60 - Figure 3 illustrates the life-cycle scenario of average propensity to save APS, the ratio of surplus to income per Japanese household head from Comparing with other years, is the year that people save more out of their income. However, the saving behavior of a typical household head at different ages shows similar saving pattern across years. Moreover, young people tends to have a higher APS than the middle-aged and the elders.

In , the young cohort age 34 and less , though has the lowest income comparing to the other middle-age cohorts, has the highest saving rate which is When people approaches retirement age of 55, APS increases slightly and then drops sharply around age In , the APS for the retiree cohort age 60 - 64 is only 9. One also notices that the Japanese household saving rates decrease with age, up to the middle-age around age 50 - 54, and then increase while approaching to the brink of retirement age. Figure 3. In the first instance of retirement, the saving rate of the elderly drops noticeably, comparing to that of the other working ages.

Moreover, saving rate of the elderly does not drop to zero or negative as predicted by the life-cycle hypothesis. Therefore, one would expect that changes in the age structure of population would alter the time path of aggregate saving and saving rate per capita. That is,. The life expectancy is 80 in this computation. Rewrite Equation 4 , one obtains saving per capita which is a function of relative share of each age group to total population. Furthermore, saving rate per capita can also be expressed as a function of relative age composition of each age group to total population:.

In order to capture the impact of demographic structure change on saving rate, one can express aggregate saving rate, , alternatively as:. This paper assumes savings are used to finance the accumulation of physical capital only. In Equation 10 the increment of capital is the residual of new injection of capital, gross investment , minus the amount new capital that is required to replace worn-out capital and to equip the needs of new capital resulting from the increased new workers. There are two changes in this model, with respect to that of Solow growth model: the first modification is the exogenously population growth rate n and the second is the saving rate s. In this paper both rates are assumed to be determined by demographic transition and vary over time as population structure changed.

The behavior of saving rate in this model has been illustrated in 7 , here we introduce the determination of population growth rate at time t:. As a consequence, n t is the net rate of increase in total population at time t. There is no immigration in this specification. The model system used in this study consists of four equations which are summarized as followings:. It has been shown that population aging alters age composition of the population which in turn affects labor supply and physical capital formation.

This section investigates the dynamic correlation among population age structure, saving, capital accumulation, and GDP growth. In the demographic aging process, the size of labor force in the economy shrinks as the age structure of total population changed. Moreover, according to the life cycle hypothesis, people at old age save less than the middle ages. Therefore, the empirical model includes demographic factor in the context of saving, capital accumulation and economic growth estimation.

The simulation exercise uses the medium variant population projections, , made by National Institute of Population and Social Security Research in Japan as baseline population input for calibration. Based on the LCH, old-age people save less than that of the prime-age working population. As a result, one would expect that increasing share of old age population in the economy would lead to a decline in average saving per head. Figure 4 illustrates the time path of the simulated scenarios of GDP, capital stock, aggregate saving , saving per capita and the corresponding growth of.

Figure 4. Growth rate of key variables in the model, baseline scenarios. The simulation results indicate that both aggregate saving and saving per capita reveal upward trend left panel, 3rd and 4th rows of Figure 4 , which do not conform to the prediction based on the LCH proposition. However, as population aging evolves both the rate of change in aggregate saving and per capita saving decrease remarkably. The simulated results also indicate that saving rate also decreases with population aging Figure 5. The simulated saving ratio declines from 0. Therefore, on significant finding of this paper is that the simulated results from this paper confirm that population aging will lead to a decline in the saving rate and saving out of current income, not the aggregate level of saving predicted by LCH.

The baseline model indicates that, absent from any counteracting force to deter the effects arising from population aging, per capita output growth and hence the living standard per capita 1st row in Figure 4 in Japan will experience modest decline in the decades to come. Given these alarming scenarios, we are interested in exploring possible policy measures that can be used to mitigate this alarming development.

This paper considers two different saving behaviors of the aging economy and their effects on GDP growth: 1 Being concerned about the reduction in future income, people may save more while they are still working. Therefore, the first experiment considers an increase in saving rate of all age groups. The effects of increasing saving rates of all age groups have positive effect in promoting output growth Figure 6. However, the effect of continuous increases. Figure 5. Figure 6. Increase saving rate of all age groups. However, in order to enjoy the long-run fruit of improved GDP growth, resulting from saving increase, people has to endure a short-run suffering of declined economic growth. The simulated scenarios in Figure 6 show that there is approximately a five-year period of downfall in growth rate due to increased savings before people can enjoy higher economic growth.

Current savings inject to future capital stock and hence increase future economic growth. The young workers? The middle-age working group? The correlation of 0. Because wealth taxes suppress savings and investment, they also undermine economic growth see Exhibit 4. The Cato Institute, a public policy research organization, estimates that such a tax would reduce the U. Research by Dr. Neither increased capital gains taxes nor a wealth tax have resulted in greater taxes being collected. While in theory increasing the capital gains tax rate from See Exhibit 5. The higher cost of capital due to increases in rates can act as a disincentive by deterring individuals from investing in the capital markets and selling existing investments including businesses , therefore decreasing velocity the rate at which money changes hands within an economy.

The consequence of a capital gains tax increase is an increase in the cost of capital and the marginal tax rate on savings and investment. This might not be the best trade-off for policymakers. From an economic viewpoint, savings and investment including early-stage investment in innovative companies increase the amount of capital in the economy and hence the amount of goods and services available. For example, historically taxpayers show proclivity for employing strategies to defer capital gains taxes to a future tax year as a consequence of dealing with tax increases.

Similarly, wealth taxes have not historically resulted in greater taxes being collected. In , 12 countries had a wealth tax, which all but four Norway, Spain, Belgium and Switzerland have since abolished. See Exhibit 6. As with the increases in the capital gains tax rate, the implementation of a wealth tax has resulted in seemingly unexpected consequences. Failure in France was blamed on problems with administration, enforcement and capital flight, as well as the disappointing revenue results. So governments, like individuals, encounter a delicate balancing act when dealing with budgets to rein in spending and increase revenue while trying to promote economic growth. They would also see an average decrease in after-tax income of 0. Despite these headwinds, there are ways that taxpayers can mitigate the possible consequences of significant changes to the capital gains tax.

Additional strategies investors can employ to mitigate the long-term impact that new tax changes present include:. In the event of a wealth tax, individuals may deploy strategies to mitigate the impact that new tax changes present. Clearly the sponsors of the current wealth tax bill are aware of this as well as the problems encountered by other countries that have attempted similar taxes. The proposed legislation includes several tough provisions designed to address these issues and avert the efforts of taxpayers seeking ways to avoid the tax.

Many economists have examined history and produced studies that explore the far-reaching implications that capital gains rates have on capital formation. These studies indicate that changes in the capital gains rates have multiple consequences, some intended and some likely unintended. However, with Active Wealth management, taxpayers can plan accordingly to maximize returns in uncertain times.

After having information regarding the presence of cointegration What are some common diagnoses for lumps on finger joints? proceed to estimate the Capital formation and economic growth correction What are some common diagnoses for lumps on finger joints?. We found that the relationship between capital formation and the proportion of non-oil exports is negative in the What are some third-grade reading books?. However, these empirical studies on the relationship between economic growth and savings have not reached unanimous conclusion, Short essay about my neighborhood to their difference in the How my writing has changed - my self-evaluation essay, periods of study, and countries being What are some common diagnoses for lumps on finger joints? for studied.