Which formula accurately represents human capital?

The correct formula for representing human capital is found in the formula that involves the sum of the weighted future earnings based on the probability of survival, adjusted for growth in wages and discounted for risk.

This approach accurately encapsulates human capital as it reflects the future income potential of an individual, factoring in the uncertainty of survival (i.e., the likelihood that the individual will continue to earn over time). By incorporating the probability of survival, the equation acknowledges that not all individuals may generate income indefinitely, thereby adjusting the expected future earnings to a more realistic value.

Further, by multiplying the prior year wage by the growth of wages, the formula projects how future earnings can escalate over time, which is a critical aspect of assessing human capital. The denominator, which includes the risk-free rate and volatility, reflects the present value concept, discounting future earnings back to their present value, accounting for uncertainty in wage growth and the time value of money.

This combination of factors makes this formula the most comprehensive and theoretical representation of human capital among the options presented, as it integrates both the income potential and the risks associated with that income over time.