BPSC 69th CCE Prelims General Studies · Question 114 of 144

Correct — D, Only 4. Human capital formation is the process of adding to a country's stock of human capital, and human capital is the knowledge, skill, competence and health embodied in its people. Statement 4 — "increasing the knowledge, skill levels and capacities of the people of the country" — is the only item on the list that states that definition whole; the other three either state a different concept or state half of this one. The field was created by Theodore W. Schultz, whose American Economic Association presidential address, published as 'Investment in Human Capital' in the American Economic Review of March 1961, argued that spending on schooling and health is investment and not consumption, and by Gary S. Becker, whose Human Capital (1964) worked out the returns; Schultz took the Nobel Memorial Prize in Economics in 1979 and Becker in 1992. Statement 1 is the rival concept, not a version of this one: 'accumulate more capital' is physical capital formation — the build-up of tangible, saleable assets such as plant, machinery and buildings, which can be separated from their owner and sold, unlike a person's skill. The strongest external support for the ruling is UPSC's own. Prelims 2018, GS Paper I, Q49 put an almost identical stem to candidates, with 'Individuals of a country to accumulate more capital' as statement 1 and 'Increasing the knowledge, skill levels and capacities of the people of the country' — BPSC's statement 4, word for word — as statement 2. UPSC's key marked that composite statement correct and ruled the capital-accumulation statement incorrect. BPSC has recycled the same pair of statements five years later, and the same ruling settles it: statement 1 out, statement 4 in, and no code on offer adds anything to 4.

• (a)Only 1 — Picks the one statement that belongs to a different concept altogether. Accumulating 'more capital' is physical capital formation — machines, buildings, tools. Physical capital is tangible, is tradable in the market independently of its owner and depreciates with use; human capital is embodied in a person, cannot be sold apart from that person, and is built by education, health care and training. UPSC's 2018 key rejected this exact wording.
• (b)1 and 2 — Carries statement 1's physical-capital error and then compounds it by admitting statement 2, 'increasing the knowledge', while dropping statement 3, 'increasing the skill levels'. Knowledge and skill are the two halves of the same definition in statement 4; there is no principle on which one of them counts as an explanation of human capital formation and the other does not.
• (c)3 and 4 — The tempting near-miss, because statement 3 is not a false proposition — raising skill levels really is part of human capital formation. But it is a fragment of statement 4, and it is the mirror image of statement 2. If 3 qualifies, 2 must qualify equally, and BPSC offers no code containing 2, 3 and 4. An option that admits one half of a pair and silently drops its twin cannot be the intended key; the composite alone can.

Human capital is the stock of knowledge, skill, competence and health embodied in a population, and human capital formation is the process of adding to that stock over time. NCERT's Indian Economic Development lists five channels through which it is built: expenditure on education, expenditure on health, on-the-job training, expenditure on migration and expenditure on information. What makes the idea distinctive is the reclassification it forces — money spent on a school or a hospital looks like consumption in the year it is spent, but the return accrues over a whole working life, so the economist counts it as investment. The counterpart concept is physical capital: tangible assets that can be sold in the market separately from their owner, that move freely across borders, and that depreciate with use. Human capital cannot be detached from the person carrying it, its mobility is limited by nationality and language, and its depreciation can be slowed by continuing education and health care.

The route to the answer is structural, not factual, and it can be walked without knowing any economics at all. Look at statements 2 and 3: 'increasing the knowledge' and 'increasing the skill levels' are symmetric halves of statement 4, differing only in which noun they keep. Two symmetric fragments cannot have different truth values, so any code that contains exactly one of them is unsound — which kills (b), holding 2 but not 3, and (c), holding 3 but not 2, in one stroke. That leaves 'Only 1' and 'Only 4'. Statement 1 speaks of accumulating capital, with no reference to people's knowledge or capacities at all, which is the definition of physical capital formation and the single discriminating fact on this item. Statement 4 states the concept in full. Hence (d). The trap is that (c) reads as generous — it seems to reward a candidate for noticing that skills matter — but generosity is exactly what an exclusive-composite item punishes, and the missing '2, 3 and 4' code is the signal that BPSC wanted the whole definition, not its pieces.

• Theodore W. Schultz's American Economic Association presidential address, published as 'Investment in Human Capital' in the American Economic Review of March 1961, founded the field; Schultz won the Nobel Memorial Prize in Economics in 1979 and Gary S. Becker, author of Human Capital (1964), in 1992
• NCERT lists five sources of human capital formation: expenditure on education, on health, on on-the-job training, on migration, and on information
• Human capital versus human development: human capital treats education and health as means to raise labour productivity, whereas human development treats them as ends in themselves — a person has a right to be educated and healthy whether or not it raises output
• NEP 2020 records public expenditure on education in India at 'around 4.43% of GDP' (para 26.1, which also traces the 6% target through the 1968 and 1986 Policies and the 1992 review) and commits the Centre and the States to reach 6% of GDP at the earliest — a target first set by the 1968 Education Policy and reiterated in 1986 and in the 1992 review
• UPSC Prelims 2018 GS-I Q49 used the same two statements and its key marked 'Increasing the knowledge, skill levels and capacities of the people of the country' correct while ruling 'Individuals of a country to accumulate more capital' incorrect

• Reading 'capital' in statement 1 as human capital. The statement says 'accumulate more capital' with no mention of knowledge or capacity, which is physical capital formation — the concept human capital theory was invented to distinguish itself from
• Treating a partial statement as correct because it is not false. Statements 2 and 3 are each true as far as they go, but this item asks which statement explains the concept, and a half-definition does not
• Assuming the longest option is a trap. On composite-definition items the long statement is usually the intended answer, because the examiner has written the textbook line out in full and chopped it up to make the distractors

BPSC likes definition-anchored statement sets on economics: it prints one textbook sentence in full, breaks the same sentence into fragments as the other statements, and offers codes that never let you tick the fragments together. UPSC asks the same concept but tests the boundary rather than the definition — its 2018 version added 'accumulation of tangible wealth' and 'accumulation of intangible wealth' so that a candidate had to know human capital is the intangible kind, and its 2013 version asked what India must do to reap the demographic dividend.

• practice — not a real PYQ

  Which of the following is NOT counted as a source of human capital formation in standard Indian economic analysis?

  • (a)Expenditure on health
  • (b)Purchase of new machinery by a firm
  • (c)On-the-job training of workers
  • (d)Expenditure on migration in search of better jobs

  Answer(b) Purchase of new machinery by a firm — that is physical capital formation. Education, health, on-the-job training, migration and information are the five recognised sources of human capital formation.

• practice — not a real PYQ

  Which economist's American Economic Association presidential address, published as 'Investment in Human Capital' in 1961, is credited with founding human capital theory?

  • (a)Amartya Sen
  • (b)Simon Kuznets
  • (c)Theodore W. Schultz
  • (d)Robert Solow

  Answer(c) Theodore W. Schultz — he argued that spending on education and health is investment rather than consumption, and shared the 1979 Nobel Memorial Prize in Economics.