Capital Formation

Topics: Investment, Economics, Capital accumulation Pages: 3 (615 words) Published: June 16, 2008
CAPITAL: Capital is defined as a physical reproducible factor of production.

LAND Gets Rent==►LABOUR Gets Wages==►CAPITAL Gets Interest, ==►ORGANIZATION Gets Profit.

CAPITAL FORMATION: is the act in which society dose not consume all of its income in day to day expenses but manages to save some of its income for farther investment

(Output, Yield)Y = Consumption (C) + Saving (S) ==► (Investment) I Y = C + S ══► I

Capital has considerable importance in economic development of any country because when we look at the definition of capital it says physical reproducible factor of production is capital. As capital involves with the production and reproduction of the factors of production some of its importance is given bellow. 1)It’s an important and physical factor in development.

2)The VCOP can be broken by capital formation.
3)The Capital Formation increases the supply of machines, and tools. 4)The scale of production expands because of CF.
(Input=process=output) improvements come to all three factors. 5)Full utilization of available resources.
6)With the increase in CF the employments will increase.
7)CF makes GNP & GDP increase which solves the problems of inflation and balance of payment (BOP) disorders. {[Inflation: A general and persistent rise in the price is called inflation ==►When demand is higher & supply is low the prices rise (↑) ==►When supply is high and demand is low the prices decline (↓)] [BOP ==► imbalance in import and export]}. 8)CF contributes in the construction of economic & social overheads (Economic==►Dams, Roads, Buildings, etc. Social==►Hospitals, Schools, Colleges, etc). 9)CF expands markets

10)CF leads to technical progress.
11)CF makes development possible even if the population is increasing. 12)CF dispenses the need of foreign aid.
13)CF increases economic welfare in a...
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