Lecture 14

# Lecture 14 - Lecture Lecture14 Roadmap Roadmap Training Why...

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Lecture 14 Human Capital Investments I

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Roadmap Education and Earnings Training l d d i Present Value and Education Investment Estimates of the Returns to Education
Why do people get more education? Joy of learning It is an investment It t il t It entails some cost Effort costs Foregone earnings Tuition And gives you some benefit Higher earnings

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Patterns for Full Time, Year Round k Workers, 2005 Males Females
Present Value When we talk about investing, we pay some cost today in return for some benefit tomorrow today, in return for some benefit tomorrow. To determine if an investment is good we have to value the benefits in the future. Since a dollar today is worth more than a dollar tomorrow we can just compare dollar amount for costs today to the dollar amount for returns in the future (especially if it is 30 years in the future). So what we do is we put all costs and benefits into present value.

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Example Going forward in time……. If the interest rate is 10% (r = 0.1). Then \$1000 dollars today is worth \$1000*(1.1)=\$1100 in one year. \$1000 d ll t d i th \$1000*(1 1)*(1 1) \$1210 i t \$1000 dollars today is worth \$1000*(1.1)*(1.1)=\$1210 in two years. \$1000 dollars today is worth \$1000*(1.1)*(1.1)*(1.1)=\$1331 in three years. Rule: 1 dollars today is worth (1+r) t in t years. X dollars today is worth X*(1+r) t in t years.
Cont’d Cont d Going back in time……. If the interest rate is 10% (r = 0.1). Then \$1000 dollars in one year is worth \$1000/(1.1)=\$909 today \$ \$ / \$ \$1000 dollars in two years is worth \$1000/[(1.1)*(1.1)]=\$826 today. \$1000 dollars in three years is worth \$1000/[(1.1)*(1.1)*(1.1)]=\$751 today. Rule: 1 dollar t years in the future is worth 1/(1+r) t today.

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