The basic characteristic of capital is that it helps to enlarge the productive potential of an economy. In that sense, investment in man to develop his abilities and skills to increase economic productivity is also a part of capital and is called "human capital". The sources of human capital are investment in education, health, on-the-job-training, migration and information.

1. Education is an important source of human capital formation. It generates technical skills and creates manpower, well suited for improving labour productivity and thus, sustaining rapid economic development. Education also results in social benefits since it indirectly spreads to those who do not receive formal education but learn from those who do. Thus, investment in education leads to higher returns in future.
2. During the course of development, an economy has to absorb new technology and develop productivity. On-the-job-training enhances labour productivity by developing their abilities and skills. This forms a part of human capital formation. Thus, firms spend on the training of the workers to enhance their productivity.
3. Information relating to the labour market, and other markets like education, health, price of physical goods etc., is necessary to make decisions regarding investment in human capital and for efficient utilisation of resources. People, thus, spend money to acquire information.