Capital Formation

Topics: Economics, Investment, Capital accumulation Pages: 5 (1508 words) Published: February 21, 2013
1. WHAT IS CAPITAL FORMATION? ITS ROLE IN ECONOMIC DEVELOPMENT Capital formation is one of the major factors in economic development. It is the increase in the stock of both material and human capital by making available a part of society's currently available resources. Capital formation results when some proportion of society's present income is saved and invested in order to increase material as well as human capital. The meaning of capital formation is that socitey does not apply to the needs and desires of immediate consumption but directs a part of it the making of capital goods, tools and instruments, machines and transport facilities, plants and equipment, all the various forms of real capital that can so greatly increase the efficiency of productive effort.'' Efficiency productivity of capital

In the modren economic life the importance of capital has increased. As human life depends upon circulation of blood like wise modern industrial system is running on the basis of capital. The importance of capital can be viewed from the following: * Gain from the Natural Resources. Utilisation of natural resources without capital is impossible, to reach mines and discover minerals, development of forests and cultivation of crop, capital is required. * Economic Development. Although goods are produced with the help of four factors of production and single factor of production is useless yet capital has gained an important position in the modern production structure. The economic condition of countries are now judged from capital possession. * Higher Living Standard. Capital halps in increasing agricultural, industrial, mineral, production and services development i.e., National Income. If the rate of increase in national income is greater than the population growth rate, living standard improves. * Efficiency of Labour. Capital increases the efficiency of labour. Labour can increase production with capital many times. * Decrease in the Cost of Production. With the involvement of capital, cost of production decreases, production increases and quality of product improves and people get it at lower price. Significance of Capital formation.

The importance or significance of capital formation in the process of economic development of a country is briefly given below. * Building up of infrastructures. The building up of sound infrastructure like, road, railways, communication system, power etc. is an important significance of capital formation. It greatly helps in breaking the vicious circle of poverty in the country. * Adoption of modern techniques of production. Capital formation helps in the use of modern techniques and adoption of complex methods of production for rapid growth in production in large scale industries. * Qualitative improvement of human resources. Capital formation plays an important role in the qualities improvement of human resources. The expenditure incurred on human resource development like educations, health environmental protection, social welfare etc, contributes to better health of the people and in the total productivity of the country. * Proper utilization of natural resources. The adequate volume of capital formation makes it possible to utilize the natural resources of a country to the maximum extent and thus increase the rate of economic growth rapidly at a higher rate. * Technological progress. Technological progress requires higher rate of capital formation. The technological improvements helps in getting more output form the same resources. * Development of agriculture and industrial sectors. Capital formation helps in the modernization of agriculture and industrial sectors in a country. The use of latest techniques of production helps in lowering cost of production and increasing production. * Higher rate of growth in national income. Capital formation is playing an important role in rising the real per capital income and GDP of the country through improved...
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