051961-Economic Essay PART 2

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051961-Economic Essay

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Quantitative Analysis

Education investments, skills andknowledge of citizens and effective uses are viewed as best optionsto effectively exploit available resources and achieve social andeconomic development. The rate of returns will be used to establishthe role of human capital investment on economic growth and lifeearnings at a micro level. Its analysis will compose of rate ofreturn estimation from education through the life time earningsmeasurement of different people at different education levels. Thebenefits will be compared to costs of education in addition toforgone earnings while at school.

Mincer earnings function will beused as an empirical model for measuring the rate of return oneducation. It is worth noting that, Mincer equation was named afterJacob Mincer, and it has been tasted in various datasets.Additionally, as argued by Thomas Lemieux, it is one of the popularmodels applied in empirical economics. In general, the earningslogarithm is used as the sum of years of a quadratic function andeducation of years of possible occurrence.

Theequation is expressed as follows

Where distinct variable havemeaning as follows

  • = earnings

  • = someone earnings without experience or education

  • =number of years spends in school

  • = it is the years of possible labor market practice.

This study will also use theneoclassical and endogenous growth theories which explain the rolesof human capital in the growth engine. Neoclassical growth theory isan economic theory that stipulates how a streamlined or steadyeconomic growth rate will sail in the same boat with three drivingforces, which are capital, technology and labor. This theory providesan in-depth definition that by varying the sums of capital and laborin the production function, it will be easier to attain anequilibrium state. For example, if a new technology is introduced,the capital and labor ought to be fine-tuned in order to sustain theequilibrium growth.

In addition, this study will alsoexplore the theoretical and empirical studies linking human capitalto the economic growth. In Neoclassical Growth Theories the HumanCapital is expressed as shown in the following function

Q=f (K, L, A, t)


Q= Total Output or Income per year of a country

K=Total Real Capital Stock

L=Labour Force Employed

A=TotalLand Used and

T= Time

Itwill also be assumed that an increase in one factor for instance ,total real capital stock (K), labour force employed(K), Total landused (L)and time(T) can result to an increase in total output(Q) orincome per year resulting from time (t). Sometimes land or A isneglected in this function, and therefore the Neoclassical GrowthTheory function will be re- written as

Q= f [K, L, A (t).]

Whereby-A (t) is the technological progress with a function of time

Thenthe Cobb- Douglas production function is incorporated to get valuefor land and its function for modeling is shown below



Y=total output from land.

A=technological progress

K=physical capital for land,

L=non reproducible input (Labour),

Theneoclassical production theory function assumes that the constantreturns to scale, meaning marginal productivity of any input decreasewith increasing stock.

Theneoclassical growth theory also states that the growth rate in longrun is determined by population growth and technical progress or noneconomic factors if not zeroed. Any measure which promotes growthenhances positive or medium growth in the long run and to achievethis it needs to be more productive exogenously.

Equilibrium growth model ofendogenous technical change will also be used where long run growthis viewed as an accumulation of knowledge. It takes knowledge as aninput in production functions and issues an alternative view of thelong run growth. It states that in equilibrium capital rate returnincreases instead of decreasing with increase in stock of capital dueto externalities from human investment.

One sector model in form of AKmodels shows that there is positive growth in the long run and can bepossible without neoclassical theories. This gave rise to adoption ofhuman and physical capital. By use of a two sector model ofendogenous growth with focus on role of human capital an economy willrecover quickly at war that brought destruction of infrastructure butgrows again slowly from an epidemic eliminating human capital.

The empirical analysiswill attempt todemonstrate that accumulationin human capital stock by increasing education expenditure helps toexplains economic growth in Uganda from 1962 to 2002. This period isused since most developing countries during this period channeledmost of their resources to human capital accumulation and from1985 todate is seen as a period for formation of human capital and itsutilization. In addition many of these countries are faced withunemployment for educated people, debt crisis and poor economicperformance.

Simple statistical tests will beused to determine the relationship between education expenditures andhuman capital and Human capital and economic growth in Uganda between1962 to 2002.Simplestatistical testswill also be used to determine the relationship between educationexpenditures and potential human capital proxies such as averageeducation expenditure per worker, adult literacy, total emolument aspercentage of total population, and average years of schooling. Therelationship will be treated in pairs by use of simple correlationsand scatter plots and expressed as a percentage of GDP.

The econometrics test will alsobe used to show the link between human capital and economic growth inUganda between 1962 -2002. After the simple statistical test andgetting indication of positive relationship between human capital andgrowth, the hypothesis that shows that human capital leads toeconomic growth and argues that education expenditure increase playskey role in motivation and support of human capital and that theendogenous growth of human capital generates economic growth.

This s paper will use the CobbDouglas aggregate production function to determine the empiricalrelationship between human capital and economic growth in Uganda. Theaggregate production will also be used to take into accounttraditional input measures of capital (K) and labour (L) in theanalysis

Theaggregate production function=Yt = AKt&quotI.lHtr,


Yt=is real GDP

Kt=physical capital,

Lt= labour force

Ht=totalamount of human capital,

A= technology parameter,

T=observation subscript,

Ci,{3, and `Yare thevariables to be estimated.

Humancapital in the Model is=Ht=StLt


St=average years of schooling



Therelationship will be estimated in that increases in the averageschooling years are related to changes in the levels of GDP.

Substitutingequation (2) into (1) gives

Yt= AKt&quot`L/S?,

WhereIl = {3 + `Y.

There arevarious determinates or variables of economic growth which will beused in the empirical analysis such as the following human capitalmeasured in terms of health and education, average years of schoolingas a proxy since it is an outcome of any education process, thefinancial system of a country, political instability physical capitalinvestment, the labor input variable or the total labor force, dummyvariable, and the GDP or total output as the dependent variables.

The results will need todemonstrate that there is a relationship between the educationexpenditure which gives rise to human capital and human capital has arelationship to the economic growth. This relationship will be foundto be positive.


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