Question

Gross capital formation will increase if which of the following takes place?
1- Gross domestic saving increases
2- Gross domestic consumption increases
3- GDP increases

• A. only 1
• B. only 1 and 2
• C. only 1 and 3
• D. none of above

Answer 1

The correct option is D none of above

Gross capital formation, in simple terms is equivalent to investment made. It was earlier called gross domestic investment. The part of GDP that is used is called gross domestic consumption, while the part that is saved is gross domestic savings (GDS). Some part of this GDS will be re-invested back, and that is called gross capital formation. Now, an increase in GDP or GDS will not necessarily lead to an increase in capital formation. Because how much in invested back will depend on many other factors.