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Role of Education in Economic Development

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  • Difficulty Level : Expert
  • Last Updated : 21 Jul, 2022
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Until recently, economists considered physical capital to be the most significant component affecting economic growth, proposing that the rate of physical capital formation in developing nations be raised to expedite the process of economic growth and boost people’s living standards. However, economic research over the last three decades has demonstrated the relevance of education as a critical determinant in economic development. The development of human abilities and knowledge of the population or labor force is referred to as education.

The key to economic progress is not only the numeric increase of educational possibilities but also the qualitative enhancement of the sort of education provided to the labor force. Education has been referred to as human capital due to its substantial contribution to economic growth, and public expenditure on education has been referred to as an investment in man or human capital.

Education and Economic Growth

Several empirical studies conducted in developed countries, on the sources of growth, or, in other words, the contributions made by various factors such as physical capital, man-hours (i.e., physical labor), education, and so on, have revealed that education or the development of human capital is a significant source of economic growth.

Rate of Return Technique

The rate of return approach has also been used to assess the contribution of education to economic growth. The rate of return in this technique is determined by individual education spending and the flow of a person’s future earnings predicted to emerge from schooling.

It should be noted that estimations of the rate of return on education investment are based on private rates of return to persons obtaining an education. However, because disparities in incomes in a market economy reflect inequalities in productivity, the rate of return on education investment is assumed to be the influence of education on the country’s production.

Expenditure on Education and Income

Another method for calculating education’s contribution is to examine the link between education spending and income. Using this method, the link between education spending and consumer income, as well as the relationship between education spending and physical capital production He discovered that “the resources dedicated to education climbed nearly three and a half times (a) relative to consumer income (b) compared to the gross production of physical capital  

Education’s Consumption Advantages

We have already discussed the investment benefits of education, as well as its influence on productivity and national production. However, investment rewards are not the only ones that come from education. Education also has consumption advantages for the individual since it allows him to “enjoy” more education and get more enjoyment from his current and future personal life.

If the welfare of society is dependent on the welfare of its individual members, then the welfare of society as a whole benefit from the higher consumption advantages of people who receive more education. Economic theory can also help us estimate the consumption advantages of education.

External Benefits of Education

We have already discussed the investment and consumption benefits of more education for both individuals and society. The benefit analysis was founded on the assumption that individuals’ private interests are congruent with the societal good.

Education, Inequality, and Poverty

 An assessment of the function of education in economic development must consider not just its influence on production growth, but also its impact on the structure and pattern of economic development, as well as on income distribution and poverty alleviation.

The fact that poor children and boys are unable to complete their secondary education, combined with large income or wage disparities between different people of different levels of education, explains why education in developing economies tends to increase income inequalities and perpetuate poverty rather than help to reduce it.

What function does education play in economic development?

As follows, education has an important influence on economic development:

  • Education enhances people’s access to current and scientific concepts.
  • It improves people’s efficiency and capacity to absorb new technologies.
  • It raises knowledge of potential possibilities and labor mobility.
  • Education helps people obtain information, skills, and attitudes that will allow them to grasp societal changes and scientific advances.
  • Education investment is one of the primary sources of human capital that enables inventions and discoveries.
  • A country’s ability to adopt sophisticated technologies is aided by a well-educated labor population.

Sample Questions

Question 1: What role does education play in economic development?

Answer : 

Consistent income for the working class offers financial stability for them, their families, and their communities. Education is regarded as human capital due of its importance to economic growth. Any sort of educational investment creates chances for national economic development.

Question 2: Why is education considered human capital?


Education is regarded as human capital due of its importance to economic growth. Any sort of educational investment creates chances for national economic development.

Question 3: What is the value of education to a country?


Education is the sole key to a nation’s success in today’s globe. It causes significant changes in a society’s social, political, and economic realms of existence. It is the only means by which mankind may develop as a whole and achieve world peace.

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