Question

Discuss the importance of capital in the modern system of production.

Answer 1

Importance of capital in the modern system of production can be traced on the following areas:
a) Volume of saving: The accumulation of capital directly depends upon saving. Saving means the difference between income and consumption. The difference can be utilized for capital formation.

b) Ability to save: It directly depends upon the income of the individuals and the taxation policy of the government. Higher income and low taxation leads to higher rate of capital formation.

c) Market conditions: The prosperity encourages and enhances the saving but depression reduces the saving of people. Capital formation is highly affected by market conditions of boom and depression.

d) Monetary policies: The economic policies pursued by the government also constitute an important factor affecting capital formation in the country. While these policies, by themselves, do not act as sources of capital formation, they act as factors affecting the sources.