Explain How Investment In Education Stimulates Economic Growth?

23.12.2022 Grady A. Lowry 0 Comments

Explain how investment in education stimulates economic growth.14 Education is one of the important sources, which facilitates the human capital formation. Investment in education will help people in acquiring new skills and knowledge which will improve their productivity and also they will be able to adopt new technology as well as to invent new methods to increase the productivity.
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How education stimulates economic growth?

Why Is Education Considered an Economic Good? – Education tends to raise productivity and creativity, as well as stimulate entrepreneurship and technological breakthroughs. All of these factors lead to greater output and economic growth.
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How does investment contribute to economic growth?

Investment and Economic Growth – Investment adds to the stock of capital, and the quantity of capital available to an economy is a crucial determinant of its productivity. Investment thus contributes to economic growth. We saw in Figure 29.4 “The Choice between Consumption and Investment” that an increase in an economy’s stock of capital shifts its production possibilities curve outward.
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How is an investment in education an investment in the economy?

Impact investing in Education – Many will agree in recognizing Education as the most powerful investment in our future. Research shows that education can make a lasting difference in people’s lives and it is not just good for individuals but also for nations.

Investing in education is not just the right move but it is also smart economies. Education lead path towards health, empowerment, and employment. Evidence shows that each additional year of education boosts a person’s income by 10% and increases a country’s GDP by 18%. Some investigations estimate that if every child learned to read this will mean 170 million fewer individuals would live in poverty.

By 2030, over 600 million more children will need to be enrolled in school to achieve basic education for all.
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Why is education important for the economic development of a country?

The Relationship Between Education and Economic Growth – Decades of research confirm that increased investment in education leads to increased economic growth. This includes higher salaries for individuals, greater workforce effectiveness, and higher gross domestic product.

New jobsGross domestic productAnnual earningsAnnual spendingFederal tax revenue

A study from The Learning Agency teases out the relationship between education and economic growth one step further, examining the economic impact not just on high school graduation rates, but on the skill level of graduates. Their findings show that increases in math, reading, and writing skills correlate to significant increases in salaries.

What’s more, these higher-skilled workers are more effective in their jobs—leading to increased innovation and productivity, which benefits the economy as a whole. The positive correlation between education and economic growth continues to track beyond high school and into postsecondary outcomes. Two studies from the Brookings Institute illustrate this relationship.

First, a college degree in any major is crucial to increasing a person’s earning potential, Second, the economic gains of postsecondary education aren’t limited to individuals, The Brookings Institute found that the average bachelor’s degree holder contributes $278,000 more to local economies than the average high school graduate through direct spending over the course of their lifetime, and an associate degree holder contributes $81,000 more than a high school graduate.

High school graduation rates are highHigh school graduates possess career-ready skillsHigh school graduates go on to complete postsecondary education

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How does education affect economic growth and development?

Education and economic growth In 1900, Spain and Finland were very similar: they were underdeveloped, largely agricultural countries with a low level of literacy (scarcely 40% of the population) and a similar income per capita.50 years on, Finland’s income per capita doubled Spain’s, all Finns were literate and secondary education had started to spread to all social classes in the country.

Meanwhile, in Spain, illiteracy was still widespread and secondary education a rarity. Almost 70 years later, and in spite of Spain’s huge economic development and improvements in terms of education, Finland’s income per capita is still higher than Spain’s. And so is its level of education. Therefore, were Finland’s educational improvements the key to its success? This must certainly be partly the case.

Education directly affects economic growth insofar as it is essential to improve human capital. Let’s take this step by step. An economy’s production capacity depends on different factors. These include physical capital, technology and the number of workers, as well as their quality.

This quality is largely determined by what is called human capital (the stock of knowledge, skills and habits). An increase in workers’ educational level improves their human capital, increasing the productivity of these workers and the economy’s output. Numerous studies in the field of labour economics have attempted to measure this relationship between a worker’s education and its productivity, called the private return to education.

And the findings have been incredibly positive. The precursor to all such studies is the equation developed by Jacob Mincer in 1974, known as the Mincer Equation. This relates workers’ earnings (seen as a way of measuring their productivity) with their years of schooling and work experience,1 It goes without saying that equating a worker’s education with their years of schooling is highly flawed since it assumes that, for instance, one additional year of primary education has the same effect on a worker’s productivity as an additional year of university education.

Neither does it take into account possible differences in the quality of the education received, particularly relevant for analyses carried out with data from different countries. Some studies therefore distinguish between primary, secondary and tertiary education and add quality controls such as the results from tests carried out internationally.

Another problem, more substantial and therefore more difficult to resolve, is whether such studies actually measure the effect of education on productivity or rather the result of talent. For instance, if more talented people are the ones who receive more education, then the estimated effect of education on productivity would largely reflect this greater talent and not the higher level of education.

In order to avoid this problem (in technical terms, an omitted-variable bias), some articles have attempted to use natural experiments. One of the most curious used identical twins with different lengths of schooling. Such twins are genetically identical and tend to have the same family environment, so their skills and habits should be very similar.

Such studies have found that one additional year of schooling results in an increase in earnings, and therefore productivity, of between 6% and 10%,2 In addition to education’s direct effect on a worker’s productivity, numerous economists also point to important education externalities for growth, larger than private returns.

Paul Romer, for instance, suggests that societies with a large number of highly skilled workers generate more ideas and consequently grow more. In a recent work, Aghion et al present a theoretical model and some empirical evidence that shows more advanced economies benefit from workers with a university education since this promotes technological innovation, augmenting the productivity of both physical capital and the workforce as a whole.

On the other hand, developing economies benefit from workers with a primary and secondary education as this helps them imitate the technologies developed in richer countries, thereby also increasing the productivity of their physical capital and workforce,3 Given their huge importance, the existence of such externalities, or social returns, and their quantification are undoubtedly important when designing educational policies in order to avoid underinvestment in education.

Individuals tend to decide the level of educational training they wish to attain based on the private returns they expect to receive and do not take social returns into account. A significant social return would therefore justify policies to encourage greater investment in education. But studies focusing on quantifying the effects of education on economic growth and which therefore attempt to reflect both private returns and externalities also face several complications.

Like studies focusing on private returns, they need to accurately measure the education variable, distinguishing between different educational levels and controlling via quality. They must also deal with a problem of inverse causality: is it the case that countries which invest the most in education grow the most and achieve the highest levels of income? Or, alternatively, do countries with higher levels of income tend to invest more in education? Both relationships are bound to exist but, in this case, we need to know the extent of the former since it will determine what kind of educational policies need to be implemented.

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In order to identify this relationship, some studies make use of what are called instrumental variables. In other words, they look for countries or regions whose educational level has changed for some reason, independently of their growth rates. A mission which, in many cases, is almost impossible. Changes in mandatory education policies or appointments of politicians on legislative committees responsible for educational investment in US states are some of the events that have been considered.

However, in such cases the findings of the different empirical studies are not conclusive: some show clearly greater social returns than private while others find that both types of return are similar,4 Lastly, other kinds of externalities also result from education.

But beyond the relevance of education in economic growth and in fostering democracy, in the words of the United Nations: «education is a fundamental human right and essential for the exercise of all other human rights».Clàudia CanalsMacroeconomics Unit, Strategic Planning and Research Department, CaixaBank

1. See Mincer, Jacob (1974), «Schooling, Experience, and Earnings», NBER Book. On the other hand, although wage income largely reflects a worker’s productivity, there are other elements that can affect it, such as legislation, the role of trade unions, etc.2.

See Card, D. (1999), «The causal effect of education on earnings», Handbook of Labor Economics 3: 1801-1863, for a summary of the empirical literature. In this summary, David Card also comments on the use of the geographical proximity variable for individuals to university as a good proxy of the talent-free educational level of individuals.3.

See Romer, P.M. (1990), «Human Capital and Growth: Theory and Evidence», Carnegie-Rochester Conference Series on Public Policy, Vol.32. And Aghion, P. et al. (2009), «The Causal Impact of Education on Economic Growth: Evidence from U.S.», Brookings Paper.4.

  1. Acemoglu, D.
  2. And Joshua, A.
  3. 2000), «How Large Are Human-Capital Externalities? Evidence from Compulsory-Schooling Laws», NBER macroeconomics annual 15: 9-59, show a small social return.
  4. And Moretti, E.
  5. 2004), «Estimating the social return to higher education: evidence from longitudinal and repeated cross-sectional data», Journal of Econometrics 121, 1: 175-212, a clearly higher social return.5.

See Glaeser, E.L., Ponzetto, G. and Shleifer, A. (2007), «Why Does Democracy Need Education?», Journal of Economic Growth 12.2: 77-99. : Education and economic growth
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Does education matter for economic growth?

4. Results at regional level – To test whether results are robust to the degree of territorial aggregation chosen, in a first step, we construct a classification matrix to choose a representative sample of Spanish regions for the analysis. We classify regions by regional income per capita and regional government expenditure per capita.

  • The information in Table AII in Appendix 2 is used to determine whether the different Spanish regions are above or below average in terms of both income and government expenditure on education.
  • For example, when income per capita in a specific region is above the average over the analysed period, then this region is considered to be in a different cell of the classification matrix than a region that is below the average.

A representative region is selected from each of the four groups of regions constructed (see Table AII, Appendix 2 ). We select four representative Autonomous Communities: Castilla y León, Cataluña, Comunidad Valenciana and País Vasco. In three of these regions (Castilla y León, Cataluña and País Vasco), the average public expenditure on fundamental public services per capita for 2009-2015 was above the average of the communities with a common system (i.e.

All Autonomous Communities, excluding País Vasco and Navarra, which have a foral system). Conversely, spending on basic public services per capita in Comunidad Valenciana is below the average of the communities with a common system, Two methodological issues regarding regional-level data should be mentioned.

First, as gross enrolment ratios are not available for Spanish regions, we use a proxy variable proposed by de la Fuente and Doménech (2015), which is constructed as the proportion of the population for which the maximum level of education achieved is either secondary or tertiary.

Second, with respect to government expenditure on education, we derive the value for each region by applying a ratio (the weight of each region’s GDP over the total Spanish GDP) to the total expenditure for the country. In addition, the sample ranges from 1971 to 2013 except for education, which goes from 1971 to 2011, and for labour force, which starts in 1977 and goes until 2013.

Data are annual in all cases. All variables are used in their logarithmic transformation. As in the country-level analysis, in a first step we carry out the Ng–Perron unit root tests for the different variables at regional level. As for the aggregate, all variables are used in their first differences.

Regarding nonlinearities, we observe how the estimated model including secondary education reflects the dependence of the economic growth on its own past, educational level of the population, physical capital, labour force and (regional) government expenditure on education. Education plays the dual role of being a determining factor of economic growth as well as the force driving its nonlinear behaviour.

We also find evidence of asymmetric effects of the variables on economic growth in the regional case; there is a notable difference regarding the sign when comparing the coefficients for the lower and the upper regimes (especially in Castilla y Léon and Cataluña).

Two issues arise in the regional analysis for secondary education. First, this variable is found to be a significant factor for the economic activity at regional level, though it was not statistically significant at country level. Second, overall, the labour force variable does not seem to exert the same influence on economic growth at regional level as it does at country level.

The observable relevance of other factors such as physical capital or public expenditure on education might be diminishing the effect of labour force. Turning to the nonlinear specification for tertiary education, all the variables considered are relevant factors explaining economic growth in the regional analysis.

Once more, the educational level plays a key role acting as the transition variable as well as a relevant factor explaining the economic growth. Asymmetries are again found (in particular, for Castilla y León and Cataluña). One aspect to mention about nonlinear models in the regional analysis is the remarkable influence of physical capital, which is often present in all models, while labour force appears as an explanatory variable to a greater extent in the aggregate analysis than in the disaggregated analysis.

Conversely, public spending on education more often appears as an explanatory variable at regional level than at country level. One explanation for this might be that the analysis using the aggregated data could be masking the importance of public spending on education for economic growth in Spain.

Regarding transition functions, one remarkable difference from the aggregate analysis for secondary education is the estimated value for the slope parameter. At regional level, the transition between the lower and the upper regime takes place at a higher speed than in the country-level analysis. The location parameters that determine the thresholds between the extreme regimes are remarkably close to the mean of the transition variable (5-6 per cent), except for Cataluña.

Finally, the estimated functions generally display a wide variation range (except for Cataluña). Regarding tertiary education, the transition between the extreme regimes is smoother at regional than at country level. Nevertheless, the changes between regimes occur at a notable speed.

The estimated thresholds between the extreme regimes range from 3 to 6 per cent; these values are very close to the respective enrolment ratio means (mainly around 4 per cent). Thus, the left and the right sides of the logistic function are fairly well balanced in terms of the number of observations.

As observed in the secondary education case, there is wide variation in the estimated transition functions. It is worth mentioning the relatively rapid transition between the extreme regimes we observe in the regional analysis. As noted in the country-level analysis, this fact points to the need for threshold specifications, thus reinforcing the relevance of STR models.

  1. Focusing on the evaluation stage, the estimated models for the four regions present no evidence of misspecification following the diagnostic statistics.
  2. Furthermore, as in the country analysis, the explanatory power of the nonlinear models substantially outweighs that of the linear specifications.
  3. Finally, just as we did for the aggregate analysis, we examine the residuals of both linear and nonlinear models for the four regions under study.
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According to the results obtained, the pattern of behaviour at regional level resembles that observed in the country-level analysis, although in some regions (Comunidad Valenciana and Castilla y León) there is even stronger evidence in favour of the nonlinear model.
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What are the benefits of investing in education?

Education is a powerful agent of change, and improves health and livelihoods, contributes to social stability and drives long-term economic growth. Education is also essential to the success of every one of the 17 sustainable development goals, GPE helps partner countries transform their education systems to ensure that every girl and boy can get the quality education they need to unlock their full potential and contribute to building a better world.
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How does an investment in education improve a country’s standard of living?

Additional years of education increase wages, on aver- age, because education increases worker productivity in the labor market, which increases output growth. Similarly, work experience is associated with higher earnings as workers develop valuable skills through on-the-job training.
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How does investing in education help the society?

Benefit for individuals and the public – There is no doubt that investing in education produces a private benefit. Individuals who are more educated are healthier, more likely to get good jobs and pay higher taxes, less likely to participate in risky behaviours, and more civically and socially engaged.
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Why is education important in economic development essay?

The essay cover topics such as “Role of Education in Economic Development of a Country. The importance of education for the economy. Role of Education in Economic Development of a Country. Role of education in development of country. The need for education in the developing countries.

  1. How does education affect development of a country? Education and economic growth in developing countries.
  2. Impact of education on economic growth.
  3. Importance of education in developing countries.
  4. Relationship between education and economic development.
  5. Role of Education in Economic Development of a Country.

Role of Education in Economic Development of a Country. Role of Education in Economic Development of a Country. The foundation of every state is the education of its youth – Diogenes Laertius Explain How Investment In Education Stimulates Economic Growth Real Development Education has always played andstill playing an important role in the development of a country, either it is developed or developing. It is one of the most fundamental factors that lead a country to a sustainable economic growth. Education has therefore become an important element of every country’s social, political and economic policy.

  • Till the mid of 20 th century, for the economic development of a country, the number of cheap labour force was considered to be an important factorbut now, in 21 st century, the trend has changed.
  • In today’s world, education has acquired top position in the list of all factors that counts for the social, political and economic growth of a nation.Education in today’s world, no doubt, is the only key to success but to get expected results of development out of education, it is necessary that focus should be given not only to quantitative but also to qualitative improvement of education.

Co-education – Merits And Demerits To discuss the role of education in the economic development of a nation, it is necessary to understand first of all the meaning of education. The word education is derived from Latin word “educare, educere or educatum” which means to leads pupils or draw out their hidden talents and potentialities.

The universally accepted meaning of education is growth, that is, the continuous unfolding of ones potentialities. It is a life-long process. Education Produce Thinkers Not Followers After defining education, it is necessary to understand the concept of economic development as well. From policy perspective, economic development is the set of efforts that seeks to improve the economic well-being and quality of life of people of a community by creating, supporting and taking some steps.

Development in terms of economic development indicators means the development of economic wealth of a country for the well-being of their inhabitants. There is however a significant difference between economic growth and economic development. Economic growth means increase in specific measures such as Gross Domestic Product (GDP), Gross National Product (GNP) or per capita income.

Economic development on the other hand implies much more. It typically refers to a variety of indicators such as literacy rate, life expectancy and poverty rate. Education For Varied Talents Generally education plays the role of leadership in a society. The function of educational institutes is to develop people physically, mentally, socially, psychologically and spiritually.

It improves social, political, economic and cultural life of people. All over the world, universities are guiding and co-operating with the industrial and agricultural development of organizations and they are developing their economies rapidly and meaningfully.

  • There is a close link between education and development.
  • Education has a very strong and direct relation with social and economic development.
  • In a contemporary world, where focus is on “knowledge based economy” the role of education becomes even more important.
  • Education leads to innovations, developments and lots of other greater achievement and advancement in a society.

Some of the developments that the education has already resulted includes; birth of civilised society, increased human capital, technical training, agricultural development, industrial development, and technological development.Education also produced think-tanks.

  • Each of these developments has been discussed in detail in below paragraphs.
  • Challenges in Higher Education The first and foremost important requirement for the economic progress of a community is its social development.
  • Only a highly civilised society, where peace and freedom in its all forms is guaranteed by the government, can achieve economic prosperity.

Education in this regard helps by developing social awareness and the spirit of humanistic approach among people.Education helps in eradicating various social, political and economic evils and problems such as social inequity, poverty, unequal income distribution, deadly competition, selfishness and so on.

  1. It develops the feelings of self-esteem and the spirit of hard work among people.
  2. It encourages the concept of healthy competition and self-sacrifice for others well-being among the masses.
  3. Explaining this aspect of education, Aristotle has rightly said “Educating the mind without educating the heart is no education at all”,

Education also teaches people those things which they have never heard before and promote in them the character of observation and analysis. It is knowledge which enables people not to follow the customs of their ancestors blindly and make sure the successful transfer of social fundamentals from one generation to another generation.

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Reforms in Examination System In terms of economics, human capital in its simplest form means a highly skilled professional labour force. Industrial revolution of eighteenth century transform the type of work and force from humanised to mechanised. Now due to sophisticated machinery, a piece of work needs only a fewprofessional labours instead of a dozen of workers.

This is because, nowadays in every field of work machines are used, which needs technically taught people to operate them safely and successfully. In twenty-first century, from teaching to the construction of mega structures, every profession has acquired the status of art.

  • In such scenario, only professionally taught people can be asset for the economy of a country, as only they can contribute efficiently in the development of the state as a whole and of economy in particularly.
  • Only education can convert a lay man to a professional workman.
  • Only teaching of technical and professional knowledge can convert youth and ordinary labour force to human capital.

Technical knowledge and training draws out the hidden talents of people and utilize it for the development of the whole society. Education Of Freedom As the trend of knowledge acquisition in a society develops, people began focusing more and more on the learning of technical knowledge and training.

This turns whole society to human capital, in which every person then put his part in the development of his country in one way or another way. Technical knowledge and training is useful because it enables every person of a society to work and earn, thus makes every person independent in society and decrease the bulk of unprofessional, idle people.

Similarly the demand of professionally taught people in market increases and it pushes other people towards knowledge acquisition, thus leads to a chain reaction of learning and hiring. Education is solution to every problem of mankind. The famous example of this could be agricultural and industrial revolution.

In the field of agriculture we see that education has totally changed the methods of cultivation and harvesting of crops. With the blessing of education, now the productivity of same piece of land has increased by more than double due to the use of fertilizer, pesticide and other advance machinery. The favours of education did not end here.

The availability of different hybrid fruits and vegetables with amazing smell, taste and colour and the availability of different types of fruits and vegetables during their off-season time, all are the gifts of education. In developed countries, where the standard of education is high, we see that their agricultural productivity is also very high.

Contrary to this, in third world countries, despite of having huge plains and labour force, the agricultural productivity of these countries is comparatively less due to low standard of education. Effects Of Globalization On Education Just like agricultural sector, the development of industrial sector of a country is also under the direct effect of the standard of education of that nation.

Education gives shape to new ideas and views and ultimately results in the economic development of the nation. History shows that man has never achieved so much development in all spheres of life, before seventeenth and eighteenth century, as much as he has achieved in the past two and half centuries.

This is mainly due to education. The industrial revolution of 1750 and the series of inventions that followed that revolution, all were the result of continuous process of observation, analysis and learning. Today we see that countries with high standard of education have more control over international market.

This is mainly because they are the founders of every new type of product and industry. They simply design and launch a product or industry and other nations follow them. These countries have achieved this unique status in world’s market simply because of education.

  • Meaning And Purpose Of Education Life in 21 st century is mostly dependent on the use of various technological appliances.
  • These appliances range from simple mobile phones to highly sophisticated robots and robotic systems.
  • Such tools, equipment and devices are manufactured by countries having technological advancement over other nations.

These countries acquired the knowledge of steam, combustion and aeronautical engineering through education. Now the production and the sale of these appliances to other less developed countries, makes a major portion of the annual revenue of these states.

Similarly due to knowledge, man has acquired control over water and air and now planning of the colonization of other planets and space. As far as the learning process is continuing, new technological wonders are expected to be seen. Education policy, if managed and organised properly, helps in the production of think-tanks, whothen can play a vital role in the development of various sectors of the society and country.

Economy in 21 st century is knowledge based and in such a scenario, the only way to be socially, politically and economically advance is to have expertise in every field of life. Role Of Education in Character Building In Pakistan, education system is governed by the Federal Ministry of education and provincial governments.

  • Pakistan though has British education system but the education standard of the country is very low.
  • This is mainly because no serious attention was given to this sector after independence.
  • Consequently the literacy rate in the country did not flourish and the country, even today lag behind in educational field from rest of the world.

The education system of the country is based on five levels of learning process which includes; Primary, Middle, Secondary, Higher Secondary and University graduation. Unfortunately, all the focus that the government has ever paid to this sector has always been remained confined to university education only.

  • Due to these problems, the country, despite of having abundant talent, could not produce highly skilled professionals.
  • In today’s world the only key of success for a nation is education.It brings major changes in the social, political and economic spheres of life of a society.
  • It is the only tool through which humanity can prosper as a whole and can establish universal peace.

Nelson Mandela has rightly said “Education is the most powerful weapon which you can use to change the world.”
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How does better education improve economy?

Education is also associated with important wider benefits such as better health and crime outcomes. Highly educated people are more productive. This is why they earn more, and are more likely to be employed.
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Why is investment important to the economy?

Investment and Economic Growth – Investment adds to the stock of capital, and the quantity of capital available to an economy is a crucial determinant of its productivity. Investment thus contributes to economic growth. We saw in Figure 29.4 “The Choice between Consumption and Investment” that an increase in an economy’s stock of capital shifts its production possibilities curve outward.
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What does it mean to say that education is a good investment?

Education helps increase your chances of getting a good job –

It has been observed that education does not only enhance people’s self-confidence but also increases their chances of landing good jobs. This is because education teaches people important skills that are necessary for them to be able to compete in the working world. Explain How Investment In Education Stimulates Economic Growth On top of that, education also helps people earn more money even if they are already employed because the fact is education increases their chances of getting a better job with higher pay. For instance, it has been observed that college graduates make an average annual salary of around $30,000 while high school graduates only earn an average of $20,000.