Question

Describe the various stages of capital formation, mentioning the importance of each stage.

Answer 1

Creation of capital is known as capital formation.

The stages are:

1. Creation of savings : Capital formation depends on savings. Saving is that part of national income which is not spent on consumption goods.

2. Conversion of savings into investment : To accelerate the rate of capital formation it is absolutely essential to convert savings into investible resources. Thus, the second stage of capital formation is concerned with channelising the savings of the household sector and convert these into loan able funds.

3. The actual production of capital goods : This stage involves the con­version of money-savings into the making of capital goods, or what is known as investment. The latter, in turn, hinges on the existing technical facilities available in the country, existing capital equipment, entrepreneurial skill and venture, rate of return on investment, rate of interest, govern­ment policy, etc.