Capital and Economic Development

Topics: Economics, Capital accumulation, Investment Pages: 10 (2615 words) Published: May 2, 2013
Chapter III


Almost all economists lay emphasis on capital formation as the major determinant of ED. Capital is a man-made factor of production. It is the one of the essentials of development found in the form of liquid cash, raw materials, tools machines, building etc. Deficiency of capital is the basic characteristic of UDCs. It is not possible to raise the level of productivity unless more capital is made available. Hence it is useful to study the importance, sources and problems of capital formation.


Capital is regarded as produced means of production. It is considered as that part of wealth of a country which is utilized for further production of wealth. Capital includes all types of reproducible wealth that are used directly and indirectly in the production of large volume of output. It is man-made and its supply can be increased by human effort.

Different economists have been defined capital formation in different ways. Some of them are as follows:

According to Colin Clark, "capital goods are reproducible wealth used for purpose of production".

According to Nurkse, capital accumulation is a process of the "diversion of a part of society’s currently available resources to the purpose of increasing the stock of capital goods so as to make possible an expansion of consumable output in the future".

According to Singer, "Capital formation consists of both tangible goods like plants, tools and machinery and intangible goods like education, health, scientific tradition and research".

The same view has been expressed by Kuznets in these words, "Domestic capital formation would include not only additions to constructions, equipment and inventories within the county, but also other expenditure..........It would include outlays on education, recreation and material luxuries that contribute to the greater health and productivity of individuals and all expenditures by society that serve to raise the morale of employed population".

Thus capital formation refers to the mobilization all sources of productive capacity - material and human - for further production of wealth.


Capital formation (or accumulation) is regarded as one of the important and principal factors in ED. According to Prof. Ragnar Nurkse, the vicious circle of poverty in UDCs can be broken through capital formation. The following are some of the factors which make capital formation essential in the process of ED.

1. To build capital equipment and creation of economic and social overhead capital: The main purpose of ED is to build capital equipment to increase productivity in agriculture, plantations and industry. Capital is also required to construct schools, hospitals, railways, roads, etc. In fine the essence of ED is the creation of economic and social overhead capital.

2. To raise the level of income, employment and output: Volume of output, income and employment in an economy mainly determined by the level of capital formation. Larger the capital formation larger will be the production which results in larger employment opportunities and hence increase in income.

3. To achieve technological progress: Capital formation leads to technical progress which helps to realize the economies of large scale production and increases specialization. It provides machines, tools and equipment for the growing labour force.

4. To expand market: Capital formation leads to expansion of market. It is capital formation which helps to remove market imperfections by the creation of economic and social overhead capital. Thus it breaks the vicious circles of poverty both from demand side and supply side.

5. To overcome the problem of population pressure: In overpopulated...
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