Group Assignment I

1. Describe and explain the essence of vintage advantage? Cohort analysis, school year

A Vintage can be defined as a group of loans that all originated with in a specific time
period. The time period considered is problem-specific and is called the vintage data.
The Vintage can be viewed as “ a set of over lapping time series with different starting
times” (Breeden, 2007, p. 4761).
Vintage analysis refers to the process of monitoring groups of loans and comparing
performance across past groups.
Cohort analysis is a type of learning which is chiefly conducted by observation over a time
period. It functions by analyzing a specific group of individuals who have an attribute or
experience in common within a given time period. It’s a good tool that can be used for
retaining customers and it is very useful for business proprietors who own websites. You
need to learn how to interpret this data. Some of the advantages of performing a cohort
analysis are: It facilitates accuracy of the study. For businesses keeping track of their
customers, it provides a clear demarcation between engagement and growth. It helps to make
an effective comparison of the result between two or more groups.  It helps to study and
analyze a wide range of data. By using cohort analysis, it helps in making the decision in
lesser time.

2. What is economics of education? Why economics of education? After all, is it important

for developing countries like Ethiopia? Why? Do you think the Ethiopian education
system is using it? If yes when, how and for what level and purposes
Economics of education is the study of economic issues relating to education,
including the demand for education, the financing and provision of education, and the
comparative efficiency of various educational programs and policies. From early
works on the relationship between schooling and labor market outcomes for
individuals, the field of the economics of education has grown rapidly to cover
virtually all areas with linkages to education.
Economics of education is a field within economics that focuses on two main
themes: the current state of, and efforts to improve, the economics curriculum,
materials and pedagogical techniques used to teach economics at all educational
levels; and research into the effectiveness of alternative instructional techniques in

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economics, the level of economic literacy of various groups, and factors that
influence the level of economic literacy. Economics education can be seen as a
process, science and product; as a process - economics education involves a time
phase of inculcating the needed skills and values on the learners, in other words, it
entails the preparation of learners for would-be-economics educator (teachers) and
disseminating of valuable economics information on learners in other for them to
improve their standard of living by engaging in meaningful venture; as a science, it
means that it is a body of organized knowledge which is subjected to scientific
proves/test; and as a product, economics education involves the inculcation of
saleable values/skills/disposition on the learners which are desirable by employers of
labour and the society at large.

It is important for developing countries like Ethiopia in that no country can

achieve sustainable economic development without substantial investment in human
capital. Education enriches people's understanding of themselves and the world. It
improves the quality of their lives and leads to broad economic and social benefits to
individuals.
Needless to say that education has its own rewards in terms of creating a better future
for individuals and society at large. With improved education, so many other areas,
like health, economy, personal attitude and the like are shaped greatly. In short,
education has the power to make the world a better place to live.

There are of course plenty of benefits that could be garnered from education. To
begin with, primary education is believed to be a gateway to laying the foundation for
students' future success

Since the collapse of command economy and even before in some cases, there has
been an increasing global trend towards the liberalization of economies including the
social sectors. Ethiopia began to undertake such measures following post 1991.

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3. Describe and explain the theoretical development of economics of education? Link
those development episodes with the origin and development of economics of education
Economic development is the process by which the economic well-being and
quality of life of a nation, region or local community are improved. The term has
been used frequently in the 20th and 21st centuries, but the concept has existed in the
West for centuries. "Modernization", "Westernization", and especially
"industrialization" are other terms often used while discussing economic
development.

Economic development originated in the post-war period of reconstruction initiated

by the United States. In 1949, during his inaugural speech, President Harry Truman
identified the development of undeveloped areas as a priority for the west:

In economics, the study of economic development was borne out of an extension to

traditional economics that focused entirely on national product, or the aggregate
output of goods and services. Economic development was concerned with the
expansion of people's entitlements and their corresponding capabilities, morbidity,
nourishment, literacy, education, and other socio-economic indicators. Borne out of
the backdrop of Keynesian economics (advocating government intervention), and
neoclassical economics (stressing reduced intervention), with the rise of high-growth
countries (Singapore, South Korea, Hong Kong) and planned governments
(Argentina, Chile, Sudan, Uganda), economic development and more generally
development economics emerged amidst these mid-20th century theoretical
interpretations of how economies prosper. Also, economist Albert O. Hirschman, a
major contributor to development economics, asserted that economic development
grew to concentrate on the poor regions of the world, primarily in Africa, Asia and
Latin America yet on the outpouring of fundamental ideas and models. It has also
been argued, notably by Asian and European proponents of infrastructure-based
development, that systematic, long-term government investments in transportation,
housing, education, and healthcare are necessary to ensure sustainable economic
growth in emerging countries.

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 “More than half the people of the world are living in conditions approaching misery.
Their food is inadequate, they are victims of disease. Their economic life is primitive
and stagnant. Their poverty is a handicap and a threat both to them and to more
prosperous areas. For the first time in history humanity possesses the knowledge and
the skill to relieve the suffering from these people ... I believe that we should make
available to peace-loving peoples the benefits of our store of technical knowledge in
order to help them the realize their aspirations for a better life… What we envisage is
a program of development based on the concepts of DZdemocratic fair dealing ...
Greater production is the key to prosperity and peace. And the key to greater
production is a wider and more vigorous application of modem scientific and
technical knowledge."

There have been several major phases of development theory since 1945. Alexander
Gerschenkron argued that the less developed the country is at the outset of economic
development (relative to others), the more likely certain conditions are to occur.
Hence, all countries do not progress similarly. From the 1940s to the 1960s the state
played a large role in promoting industrialization in developing countries, following
the idea of modernization theory. This period was followed by a brief period of basic
needs development focusing on human capital development and redistribution in the
1970s. Neoliberalism emerged in the 1980s pushing an agenda of free trade and
removal of import substitution industrialization policies.

Since the collapse of command economy and even before in some cases, there has
been an increasing global trend towards the liberalization of economies including the
social sectors. Ethiopia began to undertake such measures following post 1991

Whereas economic development is a policy intervention endeavor aiming to improve

the well-being of people, economic growth is a phenomenon of market productivity
and rise in GDP. Consequently, as economist Amartya Sen points out, "economic
growth is one aspect of the process of economic development".

4. Describe and explain the scope of economics of education by relating to the context of
Ethiopia?

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Economics of education as a systematic body of knowledge was born as a reaction to the
difficulty faced by economics in their research rather as a spontaneous recognition of the
economic dimensions of education. In other words, this new discipline is a by product of
economic research. Interest in knowing the basic determinants of economic development,
the ‘growth economists’ came across a residual in growth which could not be explained in
terms of the conventional factors of production i.e. labour and capital. In their trial and error
approach for identifying the other logical and statistical grounds, was found to be very
important variable, explaining more than 66 percentage of the residual.
The scope of economics of education however was widened subsequently as a natural
corollary of the theory. Attempts have been made to estimate the economics returns
different types and levels of accordance and to develop models of planning of education in
accordance with economic requirements of the individual and of the economy. The literature
on these aspects has developed at such a rapid pace that economics of education has now
come to receive a status of a significant branch of economics. One needs to asses the value
of the subject and its existence in the system. There are two criteria for a particular subject
being studied or taught in a given course of study. 1) Theoretical consideration: The subject
should be a body of fundamental knowledge which is a prerequisite for the understanding of
other subjects. 2) Practical consideration: The subject should have a practical significance in
the sense that its understanding would be useful in taking efficient decisions in some of the
practical problems. Economics, according to Marshall, is a study of man’s actions in the
ordinary business of life. It inquires how man gets his income and how he uses it. The other
side of the thought is – how much investments does he make in generating his personal and
national Income. While it cannot be confidently asserted that economics of education is a
fundamental discipline it cannot be denied that resource has to be taken to this subject to
explain some of the fundamental puzzles in economics theory.
 Economics of education logically covers;
- All aspects of the demand for schooling
- Relationship between educational expenditure and income
- Contributions of education to GNP
- Manpower planning and
- The impacts of schooling on subsequent outcomes.

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5. What is the essence of PPF/PPC? Describe and explain its theoretical concepts from the
perspective of opportunity cost, efficiency, measurability as well as its applicability by
giving practical examples?

The Production Possibilities Curve (PPC) is a model used to show the tradeoffs associated
with allocating resources between the production of two goods. The PPC can be used to
illustrate the concepts of scarcity, opportunity cost, efficiency, inefficiency, economic
growth, and contractions. For example, suppose Carmen splits her time as a carpenter
between making tables and building bookshelves. The PPC would show the maximum
amount of either tables or bookshelves she could build given her current resources. The
shape of the PPC would indicate whether she had increasing or constant opportunity costs.
Production Possibilities Curve (PPC) (also called a production possibilities frontier) a
graphical model that represents all of the different combinations of two goods that can be
produced; the PPC captures scarcity of resources and opportunity costs.
Opportunity cost is the value of the next best alternative to any decision you make; for
example, if Abby can spend her time either watching videos or studying, the opportunity
cost of an hour watching videos is the hour of studying she gives up to do that.
efficiency is the full employment of resources in production; efficient combinations of
output will always be on the PPC.
Inefficient use (under-utilization) of resources is the underemployment of any of the
four economic resources (land, labor, capital, and entrepreneurial ability); inefficient
combinations of production are represented using a PPC as points on the interior of the
PPC
A production possibilities curve that reflects increasing opportunity costs
The Production Possibilities Curve (PPC) is a model that captures scarcity and the
opportunity costs of choices when faced with the possibility of producing two
goods or services. Points on the interior of the PPC are inefficient, points on the
PPC are efficient, and points beyond the PPC are unattainable. The opportunity
cost of moving from one efficient combination of production to another efficient
combination of production is how much of one good is given up in order to get
more of the other good.
The shape of the PPC also gives us information on the production technology (in
other words, how the resources are combined to produce these goods). The bowed

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 out shape of the PPC indicates that there are increasing opportunity costs of
production.
We can also use the PPC model to illustrate economic growth, which is
represented by a shift of the PPC.

6. Education is both an investment and consumption that can be characterized as giant

industry having analogy with a production model). Do you agree with this statement?
Justify your answer/s briefly. Do not forget to critically examine the analogy between
the production model and the education function

Yes, education in itself is consumption as well as investment. The activities of an educated

person such as enjoying non-pecuniary (non-monetary) benefits like reading stories and
poems, enjoying higher social status, etc. are activities of consumption and the monetary
gains from a lifetime's earnings are taken as investment. Also, the absorption of a large
number of educated persons by the education system itself for carrying out teaching and
research responsibilities refers to consumption whereas the surplus educated manpower
constitutes investment which contributes to human capital formation in the economy and
forms the basis for raising the level of production. In other words, Education is treated as
consumption when it is acquired for the sake of pleasure or pursued with the intention of
getting a degree. In this sense, formal education is considered consumption. For instance,
the education of women improves their prospects in the job market. Here education is a
consumption good. Education, in terms of on-the-job training, preservice training,
development and maintenance of skills, is clearly an investment in human resources.
Production function is a schedule (or table, or mathematical equation) showing the
maximum amount of output that can be produced from any specified set of inputs, given
the existing technology or state of the art.
A Production function shows what outputs are associated with which sets of inputs.
The educational production function is in principle similar to any production function.
The later is a mathematical relation that describes how resources (inputs) can be
transformed in to educational outputs (outcomes).
Applying the production functions to education appears to provide solution to the problem
of determining the productivity of resources inputs. If the production function for school is
known, then, it is possible to predict what would happen if resources were added or
subtracted. This means one can analyze what kind of actions should be taken to promote

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 schooling outcomes; however ,the attempts to apply the idea have raised a number of
difficulties.
The educational production function is the representation for internal process that
transforms inputs to outputs.
7. Education augments productivity, trainability, segmentations, as well as competitions in
a society. Do you agree with this statement? Justify your response/s by referring to
economic theories and educational development

Yes, education in every sense is one of the fundamental factors of development. No country
can achieve sustainable economic development without substantial investment in human
capital. Education enriches people’s understanding of themselves and world. It improves the
quality of their lives and leads to broad social benefits to individuals and society. Education
raises people’s productivity and creativity and promotes entrepreneurship and technological
advances. In addition it plays a very crucial role in securing economic and social progress
and improving income distribution.
Prior to the nineteenth century, systematic investment in human capital was not considered
specially important in any country. Expenditures on schooling, on-the-job training, and
other similar forms of investment were quite small. This began to change radically during
this century with the application of science to the development of new goods and more
efficient methods of production, first in Great Britain, and then gradually in other countries.
During the twentieth century, education, skills, and the acquisition of knowledge have
become crucial determinants of a person’s and a nation’s productivity. One can even call the
twentieth century the “Age of Human Capital” in the sense that the primary determinant of a
country’s standard of living is how well it succeeds in developing and utilizing the skills and
knowledge, and furthering the health and educating the majority of its population.
The past decades have seen extraordinary expansions in access to basic education
throughout the Middle East. Many countries are now on the brink of a further increase in
access to secondary and higher education and in effecting spectacular improvements in the
quality of education offered at all levels. As increasing numbers of students complete their
basic education, their demand for education at higher levels is similarly increasing.
Educating girls and women is probably the single most effective investment a developing
country can make, whether or not women work outside the home. It creates a multitude of
positive remunerations for families including better family health and nutrition, improved

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birth spacing, lower infant and child mortality, and enhanced educational attainment of
children.
Countries in the Middle East are increasingly integrated in world markets for manufactured
goods. Their ability to compete in these markets and in globalizing service markets will
depend on the excellence of human capital they bring to the competition. Ensuring that all
citizens are educated and numerate, that many possess a wide range of problem solving
skills beyond the basic level, and that some have world class professional skills will
necessitate new curricula, improved teacher programs, and academic methods that
encourage higher order cognitive skills.
No country has achieved constant economic development without considerable investment
in human capital. Previous studies have shown handsome returns to various forms of human
capital accumulation: basic education, research, training, learning-by-doing and aptitude
Unequal education tends to have a negative impact on per capita income in most countries.
Moreover, controlling for human capital distribution and the use of appropriate functional
form specifications consistent with the asset allocation model make a difference for the
effects of average education on per capita income, while failure to do so leads to
insignificant and even negative effects of average education.
Investment in human capital can have little impact on growth unless people can use
education in competitive and open markets. The larger and more competitive these markets
are, the greater are the prospects for using education and skills.
In the earlier neoclassical models, education was not considered a major input for
production and hence was not included in growth models (Harberger, 1998: 1-2). In the
1960s mounting empirical evidence stimulated the “human investment revolution in
economic thought” (Bowman, 1960). The seminal works of (Schultz, 1961) and
(Denison,1962: 67) led to a series of growth accounting studies pointing to education’s
contribution to the unexplained residuals in the economic growth of western economies.
Other studies looked at the impact of education on earnings or estimated private rate of
returns (Becker 1964, Mincer 1974). A 1984 survey of growth accounting studies covering
29 developing countries found estimates of education’s contribution to economic growth
ranging from less than 1 percent in Mexico to as high as 23 percent in Ghana
(Psacharopoulos, 1984).

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Clearly the educational provisions within any given country represent one of the main
determinants of the composition and growth of that country’s output and exports and
constitute an important ingredient in a system’s capacity to borrow foreign technology
effectively. For example: health and nutrition, and primary and secondary education all raise
the productivity of workers, rural and urban; secondary education, including vocational,
facilitates the acquisition of skills and managerial capacity; tertiary education supports the
development of basic science, the appropriate selection of technology imports and the
domestic adaptation and development of technologies; secondary and tertiary education also
represent critical elements in the development of key institutions, of government, the law,
and the financial system, among others, all essential for economic growth. Empirical
evidence at both micro and macro levels further illuminates these relationships. At a micro
level, numerous studies indicate that increases in earnings are associated with additional
years of education, with the rate of return varying with high level of education (Behrman
1990, Psacharopoulos 1994). The returns to primary schooling tend to be greater than
returns to secondary and tertiary education (Psacharopoulos, 1994: 1325-45).
Education is also an important contributor to technological capability and technical change
in industry. Statistical analysis of the clothing and engineering industries in Sri Lanka, to
cite just one example, showed that the skill and education levels of workers and
entrepreneurs were positively related to the rate of technical change of the firm
(Deraniyagala, 1995).
According to Lucas (1998), for example, the higher the level of education of the
work force the higher the overall productivity of capital because the more educated
are more likely to innovate, and thus affect everyone’s productivity. In other models
a similar externality is generated as the increased education of individuals raises not
only their own productivity but also that of others with whom they interact, so that
total productivity increases as the average level of education rises (Perotti, 1993).
The impact of education on the nature and growth of exports, which, in turn, affect
the aggregate growth rate, is another way in which human development influences
macro performance. The education and skills of a developing country’s labor force
influence the nature of its factor endowment and consequently the composition of its
trade. It has been argued that even ‘unskilled’ workers in a modern factory normally

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 need the literacy, numeracy, and discipline, which are acquired in primary and lower
secondary school (Wood ,1994).
There is also a positive feedback from improved education to greater income
equality, which, in turn, is likely to favor higher rates of growth. As education
becomes more broadly based, low-income people are better able to seek out
economic opportunities. For example, a study of the relation between schooling,
income inequality and poverty concludes that ‘clearly education is the variable with
the strongest impact on income equality’ (Psacharopoulos, 1992).
Education may affect per capita income growth via its impact on the denominator,
i.e. population growth. For example, a study of fourteen African countries for the
mid-eighties showed a negative correlation between female schooling and fertility in
almost all countries, with primary education having a negative impact in about half
the countries and no significant effects in the other half, while secondary education
invariably reduced fertility (Birdsall 1995, Behraman and Wolfe 1987).
Education make a country’s export sector more competitive. Knowledge
accumulation influences a country’s trade performance and competitiveness
(Grossman and Helpman 1989);
Education is indispensable to economic development. No economic development is
possible without good education. A balanced education system promotes not only
economic development, but productivity, and generates individual income per capita.
Its influence is noticeable at the micro level of an individual family.

8. Education creates earning differential, and this is true even in Ethiopia. Do you agree
with this statement? Justify and explain it.
Yes, I agree :
Investment in human capital leads to higher productivity of workers, which in turn causes
higher earnings.
Education has such a strong bearing on individual earnings; it must also affect the way
income is distributed. That means, measure of income inequality in a society largely
reflect inequalities in individual attainment.

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 Human capital investment confers benefits on individuals, enterprises and societies. These
benefits may be economic in nature and accrue in the form of additional earnings,
productivity or economic growth.
The earliest explanations of the concept of human capital suggested that education or
training raised the productivity of workers, and hence increased their lifetime earnings
(Woodhall, 1987b). Education was, from the point of view of the human capital school, a
way of imparting knowledge and use skills that made the worker more productive. The
earnings of workers with more education were, therefore, justifiably more than those with
less education because they were more productive than the less educated workers. This is
the basis of viewing education as an a form of investment in human capital, that is,
education raises the productivity of workers and that higher earnings of the educated
reflect the value of their marginal productivity.
Woodhall argues that if this basis is accepted, then the relationship between earnings and
education has form major implications. First, since educated workers earn more than the
uneducated ones, their earning cm be used to measure their contribution to growth of
national income over time. Second, if it is accepted that relative earnings reflect
productivity differences, earnings differential cam be used as a measure of the economic
benefits to education in calculations of social outcomes to investment in education
(Woodhall 198% 216). Thus using differences in market earnings among individuals with
different schooling has become an acceptable way of measuring the benefits of education
in most empirical studies employing human capital models.

9. What is the essence of 'economic of scale' in education?

Economies of Scale refer to the cost advantage experienced by a firm when it
increases its level of output. The advantage arises due to the inverse relationship
between per-unit fixed cost and the quantity produced. The greater the quantity of
output produced, the lower the per-unit fixed cost. Economies of scale also result in
a fall in average variable costs (average non-fixed costs) with an increase in output.
This is brought about by operational efficiencies and synergies as a result of an
increase in the scale of production.

Economies of scale can be implemented by a firm at any stage of the production

process. In this case, production here refers to the economic concept of production

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 and involves all activities related to the commodity not involving the final buyer.
Thus, a business can decide to implement economies of scale in its marketing
division by hiring a large number of marketing professionals. A business can also
adopt the same in its input sourcing division by moving from human labor to
machine labor.

Effects of Economies of Scale on Production Costs are

1. It reduces the per unit fixed cost. As a result of increased production, the fixed
cost gets spread over more output than before.
2. It reduces the per unit variable costs. Economies of scale bring down the per unit
variable costs. This occurs as the expanded scale of production increases the
efficiency of the production process.

10. Describe and explain the difference between educational expenditure and educational
costs.

There is a tendency to use the terms expenditure and cost interchangeably. However,
the terms ‘expenditure on education’ and ‘cost of education’ are not the same. Cost of
education refers to the amount of money spent to acquire or impart education. On the
other hand, information on expenditure on education is more easily accessible and
available from budgets and accounts of the Institution at the micro level and the
Central and State governments at the macro level. From the point of view of the
individuals, costs refer to the amount of money spent during a particular period
(generally a year) to acquire education. From the point of view of the state or the
institution, it refers to the expenditure incurred on education during a year.
The term cost and expenditure are used interchangeably, but more popularly, we use
the term 'cost' and refer to cost per student pertaining to a particular level (primary,
secondary, higher secondary or university). Similarly, cost per student to the
institution/state for a particular course or level is calculated. But cost per student in
the institution/state may include expenditure incurred on staff salaries, equipment and

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 buildings, maintenance costs of apparatus, library books, sports, etc. From the point
of view of the individual, cost of acquiring education includes expenditure on books
and stationery, school fees, travel cost and in case of students making use of hostels,
it will also include rent of hostel accommodation, mess charges, etc,

11. Describe and explain the major types of educational costs. Do not forget to explain their
behaviour.
Types of Educational Costs :
 There are two types of educational coast
I. Individual or Private Costs
II. Institutional or Public or Social Costs
 In this cost there are also three types of costs;
III. Direct Costs
IV. Indirect Costs
V. Opportunity Costs
I. Individual Costs or Private Cost : Individual costs or private costs of education are
those costs of education incurred by a learner or by his/her parents/guardians or by the
family as a whole. These concern individuals in families and represent costs which the
individuals and the families must bear in return for the education received. Individual
costs are of two types: direct and indirect. Examples of private costs are as follows
:Tuition and examination fees and other such fees, institutional supplies, manuals and
books, transport, uniforms and foregone earnings.
II. Institutional/Public/Social Costs : These costs concern society and refer to such costs
(or expenditure) as are borne out as a result of all education and training activities in a
society at a given point of time. Costs incurred at the institutional level (government,
private or mixed) are called institutional costs or public costs of education. Public costs
are those that include financing by the government on the basis of taxes, loans and
other public revenues. The institutional costs of education are, generally, analyzed in
terms of (i) variable and fixed costs of education, (ii) recurring and non-recurring costs
of education and (iii) current and capital costs of education. Institutional/Public/Social
costs are also of two types: direct and indirect.

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III. Direct Costs : These are those costs that are directly visible. They include all money
expenditure incurred on different items by the student. Direct costs are expenses that
can be separately identified and charged as part of the cost of a product, service, or
department. Typical direct costs include items such as instructional and other
programme materials printed, fuel, oil and repairs of vehicles used for home-to-school
transportation, centralized data processing services, in-house equipment repairs, field
trips, expenditure on tuition fees, other fees and charges, purchase of books, stationary,
uniforms, hostel expenses and transport.
IV. Indirect Costs : Indirect costs are those costs that cannot be directly charged to a
particular programme, but are attributed to services, which are necessary to operate the
program. Such services include, but are not limited to, accounting, budgeting, payroll
preparation, personnel management, purchasing, warehousing and centralised data
processing. Some programs cap the allowed indirect cost rates, others have an
administrative cap that limits a combination of direct administrative costs and indirect
costs, while others do not allow indirect costs at all, requiring that the entire award
amount be spent on direct costs. These expenses are not paid directly to your school,
but are associated with attending school. You and your family can control some of
them. The real nature of cost could be understood only when we understand the
different concepts related to the costs of education.
V. Opportunity Cost : Opportunity cost is a concept you did not see in the definition of
economics. But not seeing it doesn’t mean that it isn’t there. There is yet more to say
about the definition, but this is the logical place to introduce a related concept.
Opportunity costs are everywhere, due to scarcity and the necessity of choosing.
Opportunity cost is not what you choose when you make a choice -it is what you did
not choose in making a choice. Opportunity cost is the value of the forgone alternative -
what you gave up when you got something. The opportunity cost of going to college is
the money you would have earned if you worked instead. On the one hand, you lose
four years of salary while getting your degree; on the other hand, you hope to earn more
during your career, due to your education, to offset the lost wages. Thus, opportunity
cost is the cost of alternatives foregone.

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12. Explain the essence of opportunity costs in education. Show how the concept of
opportunity cost functions in the context of Ethiopia.

Opportunity Cost is a concept you did not see in the definition of economics. But
not seeing it doesn’t mean that it isn’t there. There is yet more to say about the
definition, but this is the logical place to introduce a related concept. Opportunity
costs are everywhere, due to scarcity and the necessity of choosing. Opportunity cost
is not what you choose when you make a choice -it is what you did not choose in
making a choice.
Opportunity cost is the value of the forgone alternative - what you gave up when you
got something. The opportunity cost of going to college is the money you would have
earned if you worked instead. On the one hand, you lose four years of salary while
getting your degree; on the other hand, you hope to earn more during your career, due
to your education, to offset the lost wages. Thus, opportunity cost is the cost of
alternatives foregone.
Let us consider a concrete but hypothetical example. Suppose you are working in a
leather manufacturing company and by offering your service you are paid Rs. 6,000 a
month. Had you not joined the above company, let us suppose that you could have
joined a textile firm with a monthly salary of Rs. 3,500. This means that your value in
the next best alternative use is Rs. 3,500. From the individual point of view, this is
called transfer earning. Note that transfer earning is similar to opportunity cost. From
the societal point of view, this is called opportunity cost which is Rs. 3,500 in keeping
you employed in the leather manufacturing company.
The term opportunity cost takes cognizance of the fact that each investment option
involves a sacrifice of alternative opportunities to use resources. This sacrifice could
be either for the present consumption or for some other form of investment. More
specifically, the opportunity cost of a commodity/service is the value of the next best
alternative sacrifice made, in order to obtain that commodity/service. Therefore,
though there could many alternatives to give up in order to get what is desired, the
opportunity cost of a decision is the value of the most desirable alternative to be given
up so to get what is needed. For example, the opportunity cost of a KCSE graduate
who decides to pursue university education, is the salary of the best employment
he/she would have obtained. It is against this backdrop that stakeholders in the

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 education sector should be cognizant of the fact that, educational investments use
resources that have alternative uses. Some of these resources are namely;
a) Students‟ or pupils‟ time
b) Teachers‟ time
c) Finances
d) Equipment, Buildings and Land among others.
13. Education may create equality, inequality, or both. Do you agree with this statement?
Justify and explain it. Do not forget to relate your analysis with the context of Ethiopia.

There is strong evidence that education, in fact, causes higher earnings and that the
value of college has consistently grown relative to high school since 1980. Beyond
degrees, skills, acquired through informal or formal education and training, also
predict higher earnings. So, it is apparent to nearly everyone that enhancing the
opportunities to acquire knowledge and skills would make many Ethiopian better off.

Investment in human capital leads to higher productivity of worker, which in turn

causes higher earnings.

Education also help to reduce income inequalities.

Measure of income inequality in a society largely reflect inequalities in educational

attainment. The net effect of the expansion of schooling has been a reduction in the
dispersion of earnings and hence a more equal income distribution.

Yet, this idea—that more or better education can reduce inequality—has come under
fire as of late. Paul Krugman, Ezra Klein, and others have recently argued that
inequality has little or nothing to do with education.

Thomas Piketty and his collaborators have shown that the richest 1 percent absorbed
almost all income growth in recent decades. Since more than 1 percent of the
population has a bachelor’s degree, it must be something else driving the spectacular
performance of the 1 percent. Meanwhile, the median salary for bachelor’s degree
workers peaked in 2002.

Drawing attention to and understanding these trends is important. Yet, for a number
of reasons, it is misleading to suggest that education has no role in reducing income

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 inequality. Here are a few. First, not all bachelor’s degrees have fared equally. There
are huge differences in lifetime earnings across fields of study. While income growth
halted for most workers (including most college graduates) during the 2000s, those
educated in science, technology, engineering, and mathematic (STEM) and business
skills have seen decent salary growth, despite the toll of the Great Recession. For
example, computer and mathematical workers saw real median wages go up 6 percent
from 2000 to 2014, and business and finance workers and engineers saw similar
increases. Meanwhile, some of the largest occupational categories for those with
liberal arts degrees saw incomes fall, including sales workers and teachers. This
pattern is consistent with unemployment and job openings data showing a mismatch
between supply and demand for certain skills that predates the recession and was only
briefly ameliorated by it.

. In general education creates both.

14. Education and the labour market have dual relationship. Do you agree with this
statement? Justify and explain it.

Yes, different perspectives exist to reveal the relationship between education and the
labor market. Two of the perspectives are discussed below. The first perspective, that focuses
on the relationship between education and the labor market, is the human capital theory. The
human capital theory arose in the 1960s in an attempt to explain the relationship between the
level of schooling received by an individual and the individual’s success in the labor market
(Allen & Weert, 2007). Human capital is based on a set of factors including knowledge,
qualifications, abilities and individual qualities, that influence and facilitate the economic,
social and personal welfare of people (OECD, 2001; as cited in Nembot Ndeffo, 2010).
Human capital is about the personal variables that affect the development of a person’s
career. Developing human capital is important in creating employability (McArdle, Waters,
Briscoe & Hall, 2007). Human capital is helpful in the production of activities, goods and
services (Nembot Ndeffo, 2010), which are all key contributors to the productivity of the
labor market. One way to invest in human capital is through education. School is a place
where adolescents develop their human capital. Human capital makes them more productive
in the labor market and reflects in higher earnings (Becker, 1964; as cited in Allen & Weert,

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 2007). Education can be viewed as an instrument for employability, for the improvement of
productivity and for an increase of earnings. Fasih (2008) states that education is a main
determinant for good labor market outcomes. Education helps adolescents improve their
opportunities for well paid, and more prestigious employment. Investment in education is
necessary to develop human capital (Fasih, 2008). Training to develop the desired skills is a
way of increasing human capital, that contributes to the economic growth of a country
(Ansell, 2005). The World Bank and many governments are inspired by the human capital
theory. Education is seen as an economic investment. More and more attention is being paid
to the economic aims of education and the development of human capital reacting to a
globalized economy (Bell & Stevenson, 2006). The job assignment model is mentioned as a
second perspective. This model focuses more on the importance of the role demand plays in
the labor market (Allen & Weert, 2007) and focuses on the characteristics of particular jobs.
The assignment model originates from the analysis of determinants of income distribution
(Tinbergen, 1951; as cited in Sattinger, 2012). Alternative forms of this model have been
developed in recent years. The assignment model of Sattinger (1975, 2012) states that the
most competent workers must work at the most complex jobs and that less competent
workers must work at the more simple jobs (Allen & Weert, 2007). The right person with the
right skills must work at the right place in order to optimize earnings and productivity. If this
is not the case a mismatch can occur; a mismatch between the supply and demand of the
labor market (Sattinger, 1993). Employees are affected by this mismatch between the
requirement of the labor market and their own characteristics (Sattinger, 2012). A criticism
of this model is that the supply and demand are not strictly determined but each responds to
differences in wage (Sattinger, 1993). These differences in wage reconcile the distribution of
jobs and employers by compensating the employees working in a place, that does not match
their own characteristics (Sattinger, 2012).

15. Describe and explain the major approaches to planning in education. Relate its
theoretical aspects with the real context of Ethiopia

The main approaches and techniques of relating educational planning to

development planning, which are in use or recommended by various authorities are
set out below:
I. SOCIAL DEMAND APPROACH

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 The first approach, which may be called the social method is in general use, but is
scarcely a method at all, and is a starting point from which improvements must be
devised. This method takes educational needs in terms of the current demand for
education at the different levels and projects them on the basis of population increase,
age distribution, long-term national or social goals (inarticulate or defined) and on the
basis of what is known about state and consumer preferences for education. Among
such goals and preferences are universal literacy, universal compulsory primary
education, and cultural objectives. The stress is upon education as social infra-
structure for development purposes, and as an end in itself. The financial implications
of these targets are then considered. The usual result is that the funds required for the
educational expansion are found to be larger than those available either to launch or
to sustain it, on the basis of projections of national income and revenue.
II. MANPOWER REQUIREMENT APPROACH
The second approach, which we may call the manpower approach, is based on the
fact that, as we saw earlier, the main link of education with economic development is
through the knowledge and skills it produces in the labor force. To the extent that the
educational system produces qualified people in the right numbers and places, the
major part of the economic and social contribution of educational planning is
achieved, provided that in so doing the educational system has not consumed so great
a proportion of resources as to set back the development plan itself. Various methods
exist of estimating future manpower requirements and the demand they will make on
the education system.
A further limitation on the manpower approach is that it leaves out of account
provision for education as a ‘consumers’ good’, and it makes no provision for the
‘social minimum’. It is tempting to believe that these objectives might be obtained as
by-products of the training for occupation by influencing curricula, but this is
unlikely. The occupational needs of the economy are not the whole of society’s needs
for education. An addition has to be made for women and girls who are not gainfully
employed, and for the amount of education which a country requires to fulfill its
cultural, political, and social goals. It is also necessary to assure that educational
output will grow faster than demand to the degree required to stimulate growth,
without creating problems of unemployment. The educational plan must also provide

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 for turnover of employment and continuous adjustment between the educational
system and the socio-economic environment. Full account must be taken of the
‘wastage’ involved in various educational systems, as well as students switching in
mid-stream, students’ and parents’ preferences, locational disequilibrium of supply
and demand, and adjustments required by technological change.

III. EDUCATION-OUTPUT RATIO METHOD

The third method is based on the capital-output ratio approach and might be called
the education-output ratio method. It relates the stock of educated people and the
flow of children and students completing education at the different levels directly to
the national output of goods and services without passing through the intervening
stage of making manpower forecasts. A series of linear equations are set up relating
the stock of persons who have completed a given level of education, and the
number of students at each level, to the aggregate volume of production. These
equations will show how the structure of the educational system should change with
different growth rates of the economy. This method is developed by Professor
Tinbergen. Every method has its difficulties and limitations. The problem here is
that assumptions have to be made about teacher-student ratios and about the
adequacy of the relations of the education ‘mix’ to the product ‘mix’ at the base
from which the projection is made. If these assumptions are incorrectly made they
will invalidate the conclusions. Further, the differences of rates of growth in the
different economic sectors, and increases of productivity, need to be included. The
range of assumptions as to the technical coefficients is very wide. None the less this
method, used with good informed judgment, is a useful exercise to be set alongside
the other approaches.
A further difficulty common to both the manpower and the education output ratio
approaches is the assumption that a given output requires a fixed volume of
manpower with fixed amounts of education and training. The fact is, however, that
certain latitude exists for substitution of capital for manpower in general, and for
substituting additional education and training for man-hours. A given output may be
produced with a small number of highly trained workers or a large number of less

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 trained workers. It may even be possible, through automation, to produce it with a
smaller number of less highly trained workers. In short, just as the choice of
technology, and its implications for education, is an important aspect of
development programming, so is the choice between more education and training
and less employment, or less education and training and more employment in each
sector. The broader the categories of output, and the broader the definition of
educational inputs, the less fixed are the relations between them and the wider the
area of choice. In many developing countries the shortage of data, of mathematical
statisticians, and of computing facilities, would not permit computation and
projection of relationships among large numbers of output categories and large
numbers of education projects. In such cases, the choice of parameters to be used
for projection-a choice which is a policy decision and not a matter of statistical
analysis alone-is more important than the projection as such. The model provided
by Professor Tinbergen, however, breaks new ground in setting out a
comprehensive system of variables and relationships which provide a conceptual
basis for a quantitative estimation for the planning of the educational system.
IV. AGGREGATE METHOD
The fourth is the aggregate method. This method tries to relate educational needs to
the whole demand of society for education rather than to the level of output or to
manpower, and is based on norms and patterns which emerge from an empirical study
of the educational situation in countries at different stages of development. Among
them are (a) the proportion of GNP devoted to education globally and (if possible) by
sector; (b) the proportion of public expenditure devoted to education and its different
sectors; (c) the proportion of over-all investment devoted to education; (d) the
proportion of the population enrolled at the different educational levels; (e) the above
information corrected by estimates of wastage; (f) the proportions of the school-age
and student population enrolled at different levels.
Patterns of educational development in relation to over-all development can be seen
by setting these coefficients against indices of economic growth and social
attainment. Social indices can be used with the help of ranking techniques. Use can
also be made of data on what appear to be irreversible trends, e.g. the movement from
primary to secondary and tertiary occupations, and estimates of the relative rates of

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 growth of more highly qualified manpower in relation to the total growth of the labor
force. A number of problems arise in respect of the interpretation of the coefficients
listed. For example, the proportion of GNP spent on education will vary with the age
composition of the population and not reflect an equality of effort. Another variant
strongly influencing the comparison is the ratio of per capita teachers’ salaries to per
capita income, as the country differences are wide and the greatest proportion of
educational cost is made-up of teachers’ remuneration.
V. COMPREHENSIVE APPROACH
Fifth, there is what we may call the human resources assessment approach which is a
comprehensive one. It was developed by Professor Harbison. It starts from the
position that education is one of the main sources of human resource formation, other
sources being measures in the fields of manpower, employment, training and health.
The strategy of human resource development consists of integrating these factors with
general economic and social development planning. It takes into consideration such
factors as the scale of development feasible considering the availability of specialized
manpower, the scale of development needed to absorb the backlog of unemployed
and the new entrants to the labor force, the extent of in-service training in industry,
the pattern of investment priorities envisaged in the plan and the broad economic,
social and educational goals of development planning.

16. Review the concept of cost benefit analysis in education and justify its practical
applicability in the context of Ethiopia
A cost benefit analysis is done to determine how well, or how poorly, a planned
action will turn out. Although a cost benefit analysis can be used for almost anything,
it is most commonly done on financial questions. Since the cost benefit analysis
relies on the addition of positive factors and the subtraction of negative ones to
determine a net result, it is also known as running the numbers.
A cost benefit analysis finds, quantifies and adds all the positive factors. These
are the benefits. It then identifies, quantifies and subtracts all the negatives, the costs.
The difference between the two indicates whether the planned action is advisable.
The real trick to doing a cost benefit analysis well is making sure you include all the
costs and all the benefits and properly quantify them.

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The principles (purpose) of cost-benefit analysis (CBA) are:
i. Appraisal of a project: It is an economic technique for project appraisal, widely
used in business as well as government spending projects (for example should a
business invest in a new information system)
ii. Incorporates externalities into the equation: It can, if required, include wider
social/environmental impacts as well as ‘private’ economic costs and benefits so that
externalities are incorporated into the decision process. In this way, COBA can be
used to estimate the social welfare effects of an investment
iii. Time matters! COBA can take account of the economics of time – known as
discounting. This is important when looking at environmental impacts of a project
in the years ahead
Cost-benefit analysis is a term that refers both to: helping to appraise, or assess,
the case for a project, programme or policy proposal;
Cost-benefit analysis is an approach to making economic decisions of any kind.
The process involves monetary value of initial and ongoing expenses vs. expected
return. constructing plausible measures of the costs and benefits of specific actions
is often very difficult. In practice, analysts try to estimate costs and benefits either
by using survey methods or by drawing inferences from market behavior. For
example, a product manager may compare manufacturing and marketing expenses
with projected sales for a proposed product and decide to produce it only if he
expects the revenues to eventually recoup the costs. cost–benefit analysis attempts
to put all relevant costs and benefits on a common temporal footing. A discount rate
is chosen, which is then used to compute all relevant future costs and benefits in
present-value terms. Most commonly, the discount rate used for present-value
calculations is an interest rate taken from financial markets. this can be very
controversial; for example, a high discount rate implies a very low value on the
welfare of future generations, which may have a huge impact on the desirability of
interventions to help the environment. Empirical studies suggest that in reality,
people's discount rates do decline over time. because cost–benefit analysis aims to
measure the public's true willingness to pay, this feature is typically built into
studies.

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17. What is the essence of human capital theory and human development? Explain their
similarities and differences (if any)
Human capital theory is concerned with knowledge and experiences of small-scale
business owners. The general assumption is that the human capital of the founder
improves small firms' chances of survival (Bruederl et al. 1992). Human capital acts
as a resource. However, human capital theory studies usually assume that experiences
are translated into knowledge and skills. This assumption is problematic, however,
because length of experience is not necessarily a good predictor of expertise
(Sonnentag 1995). Therefore, it is not surprising that human capital factors, such as
length of managerial or industry experiences or education, are not strong predictors of
success, although in large-scale studies they usually are significant (Bruederl et al.
1992, Rauch and Frese 2000).
Human capital theory, formalized by Becker (1962) but contemporaneously developed
by others, helps us understand the training activities of firms. It (re-) introduced the
view that education and training represent investment in future productivity and not
just consumption of resources. In this perspective, firm and workers alike depend on
investments in human capital to increase competitiveness, profits, and pay. Although
the benefits are obvious, these investments come at a cost. From the firm's point of
view, investments in human capital differ from those in physical capital, in that the
firm does not acquire a property right over its investments in skills, so it and its
workers have to agree on the sharing of costs and benefits of those investments.
Whereas investments in physical capital are strictly the company's own decision,
investments in the skills of its workforce involve interaction with the employees to be
trained. In the basic formulation, Becker, assuming that product and labor markets are
perfectly competitive, introduced the distinction between firm-specific and general
human capital to solve the question: who bears the costs of training?
General human capital is defined as all skills that are identically useful to many firms,
including the training company. Firm-specific skills, in contrast, increase productivity
only in the firm in which the skills were acquired. In a competitive market setting,
workers always get a wage that equals their marginal productivity and thus, in the
case of general human capital, workers earn the same wage wherever they work.

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 Therefore the answer to the question “who bears the costs of general human capital
investment?” is straightforward.
The dominant paradigm in the economics of education is Human Capital Theory, which
suggests that education and training are investments that make individuals genuinely more
productive. Individuals who are more productive will, according to this theory, also have
higher earnings and be more employable. The private economic return to investing in
education or training, that is, the gain to the individuals, can therefore be measured by the net
gain in lifetime earnings accruing as a result of their investment in education or training
18. What is the essence of economic growth and economic development? Explain their
similarities and differences (if any)
Economic Growth refers to the rise in the value of everything produced in the
economy. It implies the yearly increase in the country’s GDP or GNP, in percentage
terms. It alludes to considerable rise in per-capita national product, over a period, i.e.
the growth rate of increase in total output, must be greater than the population growth
rate.
Economic Growth is defined as the rise in the money value of goods and services
produced by all the sectors of the economy per head during a particular period . It is a
quantitative measure that shows the increase in the number of commercial
transactions in an economy.
Economic Growth is often contrasted with Economic development which is defined
as the increase in the economic wealth of a country or a particular area for the welfare
of its residents. Here you should know that economic growth is an essential but not
the only condition for economic development.
Economic growth can be expressed in terms of gross domestic product (GDP) and
gross national product (GNP) that helps in measuring the size of the economy. It lets
us compare in absolute and percentage change, i.e. how much the economy has
progressed since last year. It is an outcome of the increase in the quality and quantity
of resources and advancement of technology.
Economic Development is defined as the process of increase volume of production
along with the improvement in technology, a rise in the level of living, institutional
changes, etc. In short, it is the progress in the socio-economic structure of the
economy.

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 Human Development Index (HDI) is the appropriate tool to gauge the development in
the economy. Based on the development, the HDI statistics rank countries. It
considers the overall development in an economy regarding the standard of living,
GDP, living condition, technological advancement, improvement in self-esteem
needs, the creation of opportunities, per capital income, infrastructural and industrial
development and much more.

Comparison Chart

Basis for
Economic Growth Economic Development
Comparison
Economic Development involves rise in
Economic Growth is the
the level of production in an economy
positive change in the real
Meaning along with the advancement of
output of the country in a
technology, improvement in living
particular span of time.
standards and so on.
Concept Narrow Broad
Increase in the indicators Improvement in life expectancy rate,
Scope like GDP, per capita income infant mortality rate, literacy rate and
etc. poverty rates.
Term Short term process Long term process
Applicable to Developed Economies Developing Economies
How it can be Upward movement in Upward movement in real national
measured? national income. income.
Which kind of
changes are Quantitative changes Qualitative and quantitative changes
expected?
Type of process Automatic Manual
When it arises? In a certain period of time. Continuous process.

The fundmntal differences between economic growth and economic development

are:

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 i. Economic growth is the positive change in the real output of the country in a
particular span of time economy. Economic development involves a rise in the
level of production in an economy along with advancement of technology,
improvement in living standards and so on.
ii. Economic growth is one of the features of economic development.
iii. Economic growth is an automatic process. Unlike economic development,
which is the outcome of planned and result-oriented activities.
iv. Economic growth enables an increase in the indicators like GDP, per capital
income, etc. On the other hand, economic development enables improvement
in the life expectancy rate, infant mortality rate, literacy rate and poverty rates.
v. Economic growth can be measured when there is a positive change in the
national income, whereas economic development can be seen when there is an
increase in real national income.
vi. Economic growth is a short-term process which takes in to account yearly
growth of the economy. But if we talk about economic development it is a long
term process.
vii. Economic growth applies to developed economies to gauge the quality of life,
but as it is an essential condition for the development, it applies to developing
countries also. In contrast to economic development applies to developing
countries to measure progress.
viii. Economic growth results in quantitative changes, but economic development
brings both quantitative and qualitative changes.
ix. Economic growth can be measured in a particular period. As opposed to
economic development is a continuous process so that it can be seen in the
long run.
To understand the two terms economic growth and economic development, we will
take an example of a human being. The term growth of human beings simply means
the increase in their height and weight which is purely physical. But if you talk about
human development, it will take in to account both the physical and abstract aspects
like maturity level, attitudes, habits, behavior, feelings, intelligence and so on. In the
like manner, growth of an economy can be measured through the increase in its size
in the current year in comparison to previous years, but economic development

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 includes not only physical but also non-physical aspects that can only be experienced
like improvement in technology and infrastructure, etc.
In general, economic development is a much bigger concept than economic growth.
In other words, economic development includes economic growth.

19. Describe and explain the essence and applicability of the theory of demand and supply
in education. Consider all the determinants of demand and supply of education.

Demand refers to how much (quantity) of a product or service is desired by buyers.

The quantity demanded is the amount of a product people are willing to buy at a certain
price.
The law of demand states that if all other factors remain equal, the higher the price of a
good, the less people will demand that good. That means the higher the price, the lower
the quantity demanded.
The demand for the school places depends on the price of schooling as well as on the
price of substitutes and compliments to schooling, the opportunity cost of children’s
time, the level of the population and the income of families.
Supply represents how much the market can offer. The quantity supplied refers to the
amount of a certain good producers are willing to supply when receiving a certain price.
The law of supply demonstrates the quantities that will be sold at a certain price.
The quantity supplied depends on the price schools receive in fees for a year of school
education and the prices the owners of schools must pay for inputs.
supply and demand as an economic model of price determination in a market. It
concludes that in a competitive market, the unit price for a particular good will
vary until it settles at a point where the quantity demanded by consumers (at
current price) will equal the quantity supplied by producers (at current price),
resulting in an economic equilibrium of price and quantity.
This apply to schools as Public schools are funded by taxes, which are extracted
from parents and non-parents alike. Taxpayers have no choice in the matter—their
money is taken by force and used for purposes they may or may not approve. For
many parents, these taxes make private education for their children impossible.
The absence of choice does not end there. Parents who cannot afford private
education or home schooling have little choice but to send their children to public

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schools. If they don’t, compulsory attendance laws could land them in jail. And,
once their children are in school, they will be taught a curriculum chosen by
politicians and educational bureaucrats, not the parents. For example, your
children might be taught evolution, though you support creationism. Every aspect
of public education renders your judgment irrelevant. You are forced to pay for a
service you may not want or need. You are forced to support the teaching of ideas
with which you may or may not agree. If consumers and taxpayers have no
choice, how can supply and demand apply to public schools? In short, it can’t.
Public schools obtain both their funds and their customers by compulsion. They
are divorced from market considerations, including supply and demand. Public
schools—and indeed, no government institution—can be operated like a business.
The only way to improve our schools is to get government out of education. Our
schools should not be run like a business, but as a business. Consider what this
would mean: Non-parents would not be forced to pay for the education of
children who are not their own. If they so desire, they are free to provide financial
assistance to anyone they choose. Parents would not be forced to subject their
children to ideas they find immoral. They would be free to select schools that
teach the ideas and values they advocate. Educators would not be compelled to
meet the demands of educational bureaucrats and politicians. They would be free
to meet the demands of the market.
Public schools describes supply and demand as an economic model of price
determination in a market. It concludes that in a competitive market, the unit price
for a particular good will vary until it settles at a point where the quantity
demanded by consumers (at current price) will equal the quantity supplied by
producers (at current price), resulting in an economic equilibrium of price and
quantity.
A privatized educational system gives parents and students meaningful choices.
And it respects the moral right of each individual to act on his own judgment. For
decades, politicians and educators have suggested an endless stream of “reforms.”
Yet, the performance of our schools continues to decline. It is time to truly allow
supply and demand into education. It is time to abolish public schools.

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20. The benefits of education can be measured. Do you agree with this statement? If your
answer 'yes,' how do measure it? If your answer 'no' why?
Yes, we can measure the benefits of education by its output at the end of finishing
the desired level of education. For example at the end;
They develop the physical and mental potential and the problem-solving capacity
of that educated person.
Behaviorally changed in their character; can be citizens who respect human rights,
stand for the well-being of people, as well as for equality, justice and peace,
endowed with democratic culture and discipline.
Education, always has been, and always will be, the most effective way to combat
adversity. Rather than harshening laws to prevent people from making mistakes,
we can encourage them to become productive members of society by providing
them with the education and training.
21. To what extent economics of education help to enhance policies, planning and
strategies? Relate the context of Ethiopia. Try to address all the major problem that are
indicated on the current Education and Training Policy of the nation (TGE, 1994).

For the past years , it is known that our country's education is entangled with
complex problems of relevance, quality, accessibility and equity. The objectives of
education do not take cognizance of the society's needs and do not adequately
indicate future direction. The absence of interrelated contents and mode of
presentation that can develop student's knowledge, cognitive abilities and behavioral
change by level, to adequately enrich problem-solving ability and attitude, are some
of the major problems of our education system. Inadequate facilities, insufficient
training of teachers, overcrowded classes, shortage of booksand other teaching
materials, all indicate the low quality of education provided. The gross participation
rate of primary education is below 22% of the relevant age cohort. Of these a large
number discontinues and relapse to illiteracy. The disparity among regions is high.
illiteracy is an overall problem of the society. Opportunities for high school
education and technical and vocational training are limited to big towns. Higher
education institutions are found only in very few regions. they are overcrowded and

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their research capacity is very low. The necessary infrastructure to provide relevant
quality education to the rural population, which is over eighty-five percent of the
population of the country, is at an insignificant level of development.
Aware of the complex problems the country has plunged in by the previous
dictatorial, self centered and vain regimes, the transitional government of Ethiopia
has embarked on charting the right direction of development to break the vicious
circle we have been entangled in.
Education, as a very important factor to human development, is of a high priority in
the overall development endeavor of the government. Hence, it requires an
appropriate direction to set a new process in motion and change the alarming
situation. For this, a comprehensive education and training policy is formulated.
It emphasizes the development of problem solving capacity and culture in the content
of education, curriculum structure and approach, focusing on the acquisition of
scientific knowledge and practicum.
Along with this, it directs that there be appropriate nexus between education, training,
research and development through coordinated participation among the relevant
organizations.
According to GTP II, greater shares of economic production will come from industry and
manufacturing with the consequent demands for middle- and higher-level skilled
manpower to be supplied by the educational system. Achieving these visions require
further expansion of access to high-quality basic, general and tertiary education; and
special efforts to improve the overall literacy and numeracy level of the population and
producing capable university graduates that serve the industry.
A policy change is normally a response to a problem or set of problems in the sector,
and must, therefore, start with an appreciation of the educational sector and its
context. In addition to the analysis of the sector itself, policy analysis should consider
a number of aspects of the social context, including political, economic, demographic,
cultural, and social issues which are likely to affect the decision making and even
implementation processes of the education sector.
In all when a country is in a problem it wants a change. Now for enhancing the change
policy is designed, Once a policy has been chosen, planning for policy implementation

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 should begin immediately. , for the implementation of the plan strategies are designed
and for all this developmental process economics of education enhance the all process.
22. Describe the historical development of planning and economics of education in brief.

Planning and economics have something in common – both of them are responses for
the challenges arising out of scarcity of resources and possibility of alternative uses
and maximum utilization of limited resources.
Planning for economic development has become basic necessity all over the world.
Educational panning is a major part of over all planning for social and economic
development.
The basic principle of objective of education is to find a major place in overall
planning and plans have to provide for financing educational development for
meeting these educational objectives. Education is in addition a public service,
demand for which is in excess of the supply that any Government is able to make.
This is because of the unchanging birth rate, falling death rate and the consequent
growth of population in the age-group between 5-24 and the rising demand for
education.

23. Describe and explain the essence of fiscal decentralization focusing on the Ethiopian
context?

According to Bland (2006), decentralization is a process of transferring power to

popularly elected local governments. Transferring power involves providing local
governments with greater political authority (e.g., convene local elections or
establish participatory processes), increased financial resources (e.g., through
transfers or greater tax authority), and/or more administrative responsibilities.
Fiscal decentralization, one of the forms of decentralization, generally refers to
the devolution of taxing and spending powers from the control of central
government authorities to government authorities at subnational levels (regional,
provincial, municipal, etc). In highly decentralized system, local governments
have considerable power to mobilize resources, through taxing authorities
accompanied by strong tax bases (Bird & Vaillancourt, 2008).
Fiscal decentralization, one form of decentralization, involves decision-making
authority transferred from the central government regarding expenditure, which

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 sets, which collects, what taxes and who under takes which expenditure (Litvack,
Ahmad and Bird, 1998; Rondinelli, 1981)

In 2002/03 the government of Ethiopia initiated the second phase of

decentralization with a series of legal, fiscal and administrative reforms beginning
with four of the largest regions (Amhara, Oromia, SNNP, and Tigray), which
together account for 87 percent of Ethiopia’s population. It was during this phase
that Woreda administrations and eventually urban administration with Woreda
status became autonomous as local governments in Ethiopia (Garcia & Rajkumar,
2008; Gebre-Egziabher, 2007). This phase of decentralization seeks to empower
communities to engage in development interventions, improve local democratic
governance, and enhance the scope and quality of delivery of basic services at the
local level.

24. The government of Ethiopia has given due attention to primary education when
compared to the other sub-sectors. Do you agree with this statement? If 'yes' please
consult documents, conduct interviews with officials and key experts in the realm of
education to justify your answer/s strongly.

Economic, political and social problems worldwide constrained the efforts of

providing basic education in many of the least developed countries in the 1980s.
Millions remained uneducated and illiterate. Even in some industrial countries
governmental funding for education decreased causing worsening of the quality of
education.
The EFA Dakar assessment is the largest evaluation of basic education ever done.
From the six educational goals introduced in Dakar Framework on goal is ensuring
that by 2015 all children, particularly girls, children in difficult circumstances and
those belonging to ethnic minorities, have access to and complete free and
compulsory primary education of good quality;
The Government of Ethiopia has adopted the goal of ensuring universal access to
and completion of basic education and reducing the adult illiteracy rate by 2015.
During the following years all children should get an access to primary education

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 Following this, eight Millennium Development Goals have been set by UN in 2000
as a Millennium Declaration to be achieved by 2015 throughout the world which
was a milestone in international cooperation, inspiring development efforts that
have improved the lives of hundreds and millions of people around the world UN
(2010). From the eight millennium development goals goal two says ‘’Achieve
universal primary education’’ (Source: UN, 2010: 2013: 6). As the UN (2010)
states these millennium development goals and targets are interrelated and should
be seen as a whole. There fore the government of Ethiopia has given due attention
to primary education when compared to the other sub-sectors to achieve MDG and
the targets which have been signed in the world.

25. What do you understand by the concept efficiency and effectiveness? Relate the context
of the education system /schools/ of Ethiopia

The principle of effectiveness and efficiency are related but distinct. An effective
higher education system or institution works in a manner that leads to achieving its
goals and objectives. An efficient system or institution functions correctly, making
optimal use of available resources without duplication or waste. A higher
education system that will serve in achieving socio-economic development must
be both effective and efficient. Good governance is a key to effectiveness and
efficiency. The creation of high quality institutions necessitates improved human
resource management, from initial efforts at staff recruitment to the administration
of research and other funding. Modern higher education must be flexible,
innovative and responsive.

26. Describe and explain the types of capital by relating to the education system of
Ethiopia.

Educational capital refers to educational goods that are converted into commodities to

be bought, sold, withheld, traded, consumed, and profited from in the educational system.
Educational capital can be utilized to produce or reproduce inequality, and it can also
serve as a leveling mechanism that fosters social justice and equal opportunity.
Educational capital has been the focus of study in Economic anthropology, which

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provides a framework for understanding educational capital in its endeavor to understand
human economic behavior using the tools of both economics and anthropology

The following are different examples of types of capital:

1. Financial (Economic) Capital

Financial capital is necessary in order to get a business off the ground. This type
of capital comes from two sources: debt and equity. Debt capital refers to
borrowed funds that must be repaid at a later date, usually with interest.
2. Human Capital

Human capital is a much less tangible concept, but its contribution to a company's
success is no less important. Human capital refers to the skills and abilities a
company's employees bring to the operation.
3. Social Capital

Social capital is an even more intangible asset, referring to the relationships

people have to each other, and the desire they have to do things for and with
others within their social networks. People tend to do things to help and
encourage those in their same social network, creating a cycle of mutually
beneficial reciprocity. In an individual's social network, social capital is the value
of the content of the relational ties between people and not a product of the
members of the network in and of itself. For instance, if you have a wealthy uncle
in your network, knowing he could lend you money in a pinch would be to
leverage that relationship's social capital.

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27. Education contributes to economic growth and economic development of a given
nation. Would it possible to measure this claim. Describe and explain the methods or
approaches to be used if any.

The creation and expansion of educational opportunities at all levels have been
actively pursued all over the world, in the belief that education does contribute to
economic growth by way of :
a) creating a more productive labour force and endowing it with increased
knowledge and skills which increase production;
b) providing widespread employment and income-earning opportunities for teachers,
school building and construction workers, textbook printers, school uniform
manufacturers, etc.;
c) creating a class of educated persons to fill vacancies created by departing
expatriates (in the case of countries recently freed from colonial occupation) or

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 otherwise vacant positions in governmental services, public corporations, private
businesses and professions; and
d) providing the kind of training and education that would promote literacy,
numeracy and basic skills while encouraging modem attitudes on the part of
diverse segments of the population.
Education influences economic development. Education system provides the labor
force that matches the needs of economy. This is called ‘the man power allocation
function of education’. Education is a prerequisite of economic growth. Economic
development assumes a particular set of attitudes and values. Education is capable
of generating a climate for growth. It is wide spread belief that now that in context
of economic development education can yield both financial and non financial
returns. For a proper understanding of the various aspects that come into play in
the field of education, it is essential to the opportunity available for different
sections of people, who bears the cost and who benefits, and the ability to pay for
education by different sections of people.

28. What do you understand by structural adjustment program? Describe, how it was
introduces, its requirements, its failure or success in general and in the context of
Ethiopia in particular
Structural Adjustment refers to a set of economic policies often introduced as a
condition for gaining a loan from the IMF (international monitory fund). 
Structural adjustment policies usually involve a combination of free-
market policies such as privatization, fiscal austerity, free trade and deregulation.
Structural adjustment policies have been controversial with detractors arguing the free
market policies are often unsuitable for developing economies and lead to lower economic
growth and greater inequality. Supporters of structural adjustment (IMF and World Bank)
argue that these free-market reforms are essential for promoting a more open and efficient
economy, which ultimately help to improve living standards and reduce relative poverty.
A structural adjustment is set of economic reforms that a country must adhere to in order
to secure a loan from the International Monetary Fund and/or the World Bank. Structural
adjustments are often a set of economic policies, including reducing government spending,
opening to free trade and so on.

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 Structural adjustments are commonly thought of as free market reforms, and they are
made conditional on the assumption that they will make the nation in question more
competitive and encourage economic growth.
Structural adjustment programs have demanded that borrowing countries introduce
broadly free-market systems coupled with fiscal restraint—or occasionally
outright austerity. Countries have been required to perform some combination of the
following: 
 Devaluing their currencies to reduce balance of payments deficits. 
 Cutting public sector employment, subsidies, and other spending to reduce budget
deficits.
 Privatizing state-owned enterprises and deregulating state-controlled industries.
 Easing regulations in order to attract investment by foreign businesses.
 Closing tax loopholes and improving tax collection domestically.

Structural adjustment encourages countries to become economically self-sufficient

by creating an environment that is friendly to innovation, investment and growth.
Unconditional loans, according to this reasoning, would only initiate a cycle of
dependence, in which countries in financial trouble borrow without fixing the
systemic flaws that caused the financial trouble in the first place. This would
inevitably lead to further borrowing down the line.

Structural adjustment programs have attracted sharp criticism, however, for

imposing austerity policies on already-poor nations. Critics argue that the burden
of structural adjustments falls most heavily on women, children, and other
vulnerable groups.

Critics also portray conditional loans as a tool of neocolonialism. According to this

argument, rich countries offer bailouts to poor ones—their former colonies, in
many cases—in exchange for reforms that open the poor countries up to
exploitative investment by multinational corporations. Since these firms'
shareholders live in rich countries, the colonial dynamics are perpetuated, albeit
with nominal national sovereignty for the former colonies.

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 Enough evidence had built from the 1980s to the 2000s showing that structural
adjustments often reduced the standard of living in the short-term within countries
adhering to them, that the IMF publicly stated that it was reducing structural
adjustments. This appeared to be the case through the early 2000s, but the use of
structural adjustments grew to previous levels again in 2014. This has again raised
criticism, particularly that countries under structural adjustments have less policy
freedom to deal with economic shocks, while the rich lending nations can pile on
public debt freely to ride out global economic storms that often originate in their
markets.
29. Total costs in education are not recommendable for diagnostic and evaluative purposes.
Do you agree or disagree? Justify your answer/s.

Yes we agree; the cost of an educational plan or innovation is often expressed in

terms of its total cost to indicate the value of the total resources devoted to it. But for
diagnostic and evaluative purposes, unit cost is more meaningful. Unit cost is cost per
educational unit, e.g,, cost per student, cost per school, cost per teacher, etc. But
education has multiple outputs measured variously in terms of student achievement,
number of graduates passed, and so on. Hence, while estimating unit cost, due care
should be taken to avoid ambiguity. For example, cost per student may imply:
- cost per student enrolled:
- cost per student actually attending school; or
- cost per student successfully completing a given course.
The problem of deciding on the unit cost has to be solved carefully. Choosing the
number of students may not always be the right thing to do because all costs do not
vary with the number of the students; for instance, the teachers and their salaries, the
number of square meters of building space, etc. Hence, cost per teacher or cost per
school should also be considered.
Unit costs are likely to rise due to changes in the price level, increase in learner
population, rise in the educational standards, demand for education as well as the
pressure for raising the level of school-going age. In making long term forecasts, we
have to take note first of the increase in the number of students, teachers and schools
and secondly, of the rise in cost per unit.
30. Describe and explain the essence of PPI

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 The producer price index, or PPI, is a group of indexes that calculates and
represents the average movement in selling prices from domestic production over
time. PPI is a product of the Bureau of Labor Statistics (BLS). The
PPI measures price movements from the seller's point of view. Conversely,
the consumer price index (CPI), measures cost changes from the viewpoint of the
consumer. In other words, this index tracks change to the cost of production.

There are three areas of PPI classification that use the same pool of data from the
Bureau of Labor Statistics. These three areas are industry classification,
commodity classification, and the commodity-based final and intermediate demand
(FD-ID).

The PPI is considered an objective tool for adjusting prices in long-term

purchasing agreements.
31. Find out the first three budget priorities sectors as per the budget allocation made by
the Federal the government Ethiopia, each of its 9 National Regional States and the two
City Administrative Councils with its possible justifications.

As the Source: Data from MoFEC the first three budget priorities sector were
i. Education
ii. Road Construction
iii. Agriculture & Food Security
The government has continuously prioritized investments first in Education sector, which
has contributed to a rapid expansion of access to all education levels along with a sharp
increase in the number of teachers and schools. As a result, the education system has
expanded from 10 million students in 2005/06 to 25 million students in 2014/15
For example the education sector accounts for the largest proportion of the GoE’s spending
at 24.2 per cent of total expenditure in 2015/16 reflecting the strong commitment of the GoE
to educational development. However, it should be noted that due to linkages across sectors,
spending in sectors such as health and road construction (especially rural roads) has
spillover effects that positively affect education outcomes. For instance, healthier children

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 are more likely to have higher school attendance rates, while rural roads facilitate access to
education services.
References

 The Economics and Financing of Education (EdPM 614) ; Jeilu Oumer (PhD) ,
AAU, 2008 Addis Ababa.
 The Role of Education in Economic Development:
 Financing and Efficiency in Education Reference for Administration and
Policymaking MANUEL ZYMELMAN HARVARD UNIVERSITY
 Arthur Lewis, ‘Education and Economic Development’, UNESCO lECA Conference
of African States on the Development of Education in Africa, Addis Ababa. 15-25,
May 1961. Final Report, Paris, 1961, pp. 71-9.
 Education policy-planning process: an applied framework Wadi D. Haddad with the
assistance of Terri Demsky Paris 1995 UNESCO: International Institute for
Educational Planning
 FEDERAL DEMOCRATIC REPUBLIC GOVERNMENT OF ETHIOPIA
EDUCATION AND TRAINING POLICY Addis Ababa April, 1994
 M. A. EDUCATION PART – II GROUP A PAPER 2 ECONOMICS OF
EDUCATION

 The Education and Training Policy and its Implementation Ministry of Education
February 2002 Addis Ababa

 Economic Focus Education and Development in Ethiopia Seyoum Teffera*

Translated by Yonas Admassu
 Ethiopian Education Development Roadmap (2018-30)
 The Potential of Cohort Analysis for Vintage Analysis University of Twente
Enschede , The Netherland 1/23/2012
 Different Sample Education Materials related to the questions from the web site.

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