Define capital formation. Explain three important stages of capital formation.
Capital Formation: "Capital formation consists of both tangible assets like plants, tools and machinery and intangible Assets like high standard of education, health, scientific progress and research."
Stages of Capital Formations:
A change in the stock of capital in any economy during any particular time period is called capital formation. The process of capital formation consists of the following steps:
(i) Creation of Savings: It is the first step in the process of capital formation. It is saving which are transformed into capital. If there is no saving, there cannot be any capital formation, even if all other conditions are favourable for capital formation. Savings are done by households and it depends on their income and willingness to save.
(ii) Mobilization of Savings: If savings are kept in the form of idle cash at home, they will not lead to capital formation. The mobilized savings must be actually used by producers for the purpose of investment. For instance, the money kept by the people in the banks must be lent out by the banks to the producers who can use the money, for ex., installing new machines in their factories.
Capital Formation: "Capital formation consists of both tangible assets like plants, tools and machinery and intangible Assets like high standard of education, health, scientific progress and research."
Stages of Capital Formations:
A change in the stock of capital in any economy during any particular time period is called capital formation. The process of capital formation consists of the following steps:
(i) Creation of Savings: It is the first step in the process of capital formation. It is saving which are transformed into capital. If there is no saving, there cannot be any capital formation, even if all other conditions are favourable for capital formation. Savings are done by households and it depends on their income and willingness to save.
(ii) Mobilization of Savings: If savings are kept in the form of idle cash at home, they will not lead to capital formation. The mobilized savings must be actually used by producers for the purpose of investment. For instance, the money kept by the people in the banks must be lent out by the banks to the producers who can use the money, for ex., installing new machines in their factories.
