increasing incomes. In this section, we will generally illustrate points with educational
investments, but the same principles apply to health investments.
The impact of human capital investments in developing countries can be
quite substantial. Figure 8.1 shows the age-earnings profiles by levels of education
in Venezuela. The chart shows how incomes vary over the life cycle for
people with various levels of education. Note that those with higher levels of
education start full-time work at a later age, but as the graph shows, their incomes
quickly outpace those who started working earlier. But such future income
gains from education must be compared with the total costs incurred to
understand the value of human capital as an investment. Education costs include
any direct tuition or other expenditures specifically related to education,
such as books and required school uniforms, and indirect costs, primarily income
forgone because the student could not work while in school.
Formally, the income gains can be written as follows, where E is income
with extra education, N is income without extra education, t is year, i is the
discount rate, and the summation is over expected years of working life: