5. Evaluate the view that investment in human capital is the most effective way to promote economic development.

Economic development is defined as an increase in the standards of living across broad sections of society. Investing in human capital, the labor used in production of goods and provision of services, will certainly improve the quality of products available to consumers. This consumption of better products aids the standard of living.Also, a higher quantity is produced as improving the human capital increase productivity. Apart from raising living standards of consumers, investing in human capital, through education and better health care, will certainly make workers more skillful and productive, and capable of demanding higher wages. They have more knowledge, and fewer health problems allow them to be more committed to work. This raises their standard of living as well, thus having effects on the rest of the economy. This investment not only brings about economic development in the economy, but also creates economic growth, by increasing real output.
PPF.png LRAS.png

This can be seen in the figures above. The production Possibilities curve shows a shift out to PPF2, as the maximum combinations of goods and services that can be produced increases. This is also seen as an outward shift in the LRAS curve out to LRAS2. The GDP has increased in addition to the standards of living within the economy.

However, it is important to consider the economy in question when deliberating whether it is most effective. In developing countries where the labor force (human capital) is most abundant, it may certainly seen as most effective. But it would not, alone bring about as much development as possible. An increase in the physical capital would also be needed in order to provide the human capital's increased productivity, resources to work with. Physical capital includes machinery and equipment and is usually fixed in the long run. In most developed countries, improving and investing i this physical capital is seen as an effective way of bringing about development, in addition to education and health care. This would hold true in developing countries as well.