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Unformatted text preview: cture 14 Lecture 14 Human Capital Investments I oadmap Roadmap • ucation and Earnings Education and Earnings • Training • Present Value and Education Investment • Estimates of the Returns to Education hy do people get more education? Why do people get more education? • y of learning Joy of learning • It is an investment – It entails some cost • Effort costs regone earnings • Foregone earnings • Tuition nd gives you some benefit And gives you some benefit • Higher earnings Patterns for Full ‐ Time, Year ‐ Round Workers, 2005 Males Females resent Value Present Value • When we talk about investing, we pay some cost day 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 sts today to the dollar amount for returns in 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. ample 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 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. ont’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....
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This note was uploaded on 01/09/2010 for the course ILRLE 2400 at Cornell.
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