Suppose two countries have 4 and 9 years of average schooling respectively. Prim

Question

Suppose two countries have 4 and 9 years of average schooling respectively. Primary schooling makes up the first four years, secondary schooling makes up the next four and the remaining years make up higher education. The returns to secondary education are 10% per year and higher education are 6% per year. Calculate the relative human capital per worker for the two countries (you can assume that the returns to primary education are the same in both countries but we are not told what that number is).

Explanation / Answer

We take the units of human capital as the prospective earnings of an individual.

Let us assume that both countries have 100 as their population, and each individual earns $1000 after primary education.

Thus, after secondary education, each individual from both the countries will earn $1100.

Now, there is a 6% return on higher education, thus people from country B(the country with more educated people) will earn = (1100*106/100) = $1166.

Thus, the relative return is = 1166/1100 = 1.06

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