Discuss the Micro economic and Macro economic implications of the government
spending more on Education and Training. (15)
From the microeconomic prospect, with better education and training, workers are likely to
have better skills and higher productivity. This means that the marginal physical product will
increase for each worker, causing marginal revenue product to rise. LRAS curve will thus
shift to the right, and as more goods are produced at a lower price, both domestic and
export demand will rise, causing the aggregate demand curve to shift to the right. This raises
the demand for labour therefore causes wages to rise and unemployment to fall. As wages
rise, standard of living of the population rise as they are now available to more goods and
services, poverty will also fall.
However, the extent of these benefits all depend on the quality of education, a better
education will bring about higher increase in MPP thus more significant benefits. Amount of
wages that can be raised also depends on the competitiveness of the labour market, if there
is only one firm demanding for labour in a specific market, it is said to have monopsony
power over the supply of labour, therefore wages may not rise and workers may be
exploited. Moreover, rising wages may lead to cost-push inflation, thus even with a risen
wage, the ‘basket of goods’ that can be afforded may be the same as before. Lastly,
standard of living isn’t only determined by wages, it also depends on politics, freedom of
speech and family relationships.
From the macroeconomic perspective, improving education and training can raise the
country’s overall productivity, causing LRAS to rise, shifting the curve to the right, thus
making the country more competitive as higher quantity and quality of goods are likely to be
produced at a lower price. Moreover, as real national output rises due to higher aggregate
supply, sustainable growth will be resulted. And as the economy grow, workers are likely to
have higher wages, leading to more savings. According to the Harrod-Domar model, with
higher savings, investment will rise leading to higher capital stock and eventually higher
economic growth. Furthermore, with more skilled labour, more FDI will be attracted,
causing the economic growth to be raised further.
However, in many developing countries such as Iran, brain drain is an increasingly
problematic phenomenon. There is a 220% increase in the number of Iranian students
emigrating in 2017 due to lack of job opportunities. In fact, more than 50% of Iran’s
educated are unemployed and others are actually working in construction sites, or have
resorted to trade, resembling anything but their studies. With higher government spending
on education but also increasing emigration of educated workers, GDP will fall as the
withdrawal from the circular flow of income rises.
On the other hand, in developed countries such as the US, its outstanding education system
and wide range of job opportunities have attracted many immigrants and overseas students.
In 2018, 17 percent of college-educated U.S. adults age 25 and older were born abroad. And
these immigrants have made up an important source of higher-educated workers, many
locals are left to do the lower-paid jobs. These immigrants and overseas workers may send
remittances back to their hometown, which is a withdrawal from the circular flow of
spending more on Education and Training. (15)
From the microeconomic prospect, with better education and training, workers are likely to
have better skills and higher productivity. This means that the marginal physical product will
increase for each worker, causing marginal revenue product to rise. LRAS curve will thus
shift to the right, and as more goods are produced at a lower price, both domestic and
export demand will rise, causing the aggregate demand curve to shift to the right. This raises
the demand for labour therefore causes wages to rise and unemployment to fall. As wages
rise, standard of living of the population rise as they are now available to more goods and
services, poverty will also fall.
However, the extent of these benefits all depend on the quality of education, a better
education will bring about higher increase in MPP thus more significant benefits. Amount of
wages that can be raised also depends on the competitiveness of the labour market, if there
is only one firm demanding for labour in a specific market, it is said to have monopsony
power over the supply of labour, therefore wages may not rise and workers may be
exploited. Moreover, rising wages may lead to cost-push inflation, thus even with a risen
wage, the ‘basket of goods’ that can be afforded may be the same as before. Lastly,
standard of living isn’t only determined by wages, it also depends on politics, freedom of
speech and family relationships.
From the macroeconomic perspective, improving education and training can raise the
country’s overall productivity, causing LRAS to rise, shifting the curve to the right, thus
making the country more competitive as higher quantity and quality of goods are likely to be
produced at a lower price. Moreover, as real national output rises due to higher aggregate
supply, sustainable growth will be resulted. And as the economy grow, workers are likely to
have higher wages, leading to more savings. According to the Harrod-Domar model, with
higher savings, investment will rise leading to higher capital stock and eventually higher
economic growth. Furthermore, with more skilled labour, more FDI will be attracted,
causing the economic growth to be raised further.
However, in many developing countries such as Iran, brain drain is an increasingly
problematic phenomenon. There is a 220% increase in the number of Iranian students
emigrating in 2017 due to lack of job opportunities. In fact, more than 50% of Iran’s
educated are unemployed and others are actually working in construction sites, or have
resorted to trade, resembling anything but their studies. With higher government spending
on education but also increasing emigration of educated workers, GDP will fall as the
withdrawal from the circular flow of income rises.
On the other hand, in developed countries such as the US, its outstanding education system
and wide range of job opportunities have attracted many immigrants and overseas students.
In 2018, 17 percent of college-educated U.S. adults age 25 and older were born abroad. And
these immigrants have made up an important source of higher-educated workers, many
locals are left to do the lower-paid jobs. These immigrants and overseas workers may send
remittances back to their hometown, which is a withdrawal from the circular flow of
