WHAT IS CAPITAL FORMATION OR ACCUMULATION?
Capital Formation means to increase in the stock of real
capital in an economy. The more capital involves making more goods which
are all used for further production of goods. Capital formation is also
known as capital accumulation.
According
to SINGER
The capital formation consists of both tangible goods like
plants, tools and machinery and intangible goods like education, health,
scientific tradition and research.
According
to DILLARDS
Increase in real assets of a country is capital formation.
Definition
"Capital formation means the increase in the stock of real
capital in a country. It involves making more capital goods such as
machines, tools, factories, transport equipment, materials, electricity, etc.
which are all used for further production of goods".
Role or Importance of Capital Formation
The main functions of capital formation aro as under:
(1) Important
Factor of Production
Capital is an important factor of production. Before starting
a business, we need the source used in producing e.g. machinery, etc.
(2) Purchasing
Raw Material
Raw materials are necessary for the production of finished
goods. Capital is used to purchase the necessary raw materials.
(3) Payment
of Wages
Labourers are employed and rewards of their mental and physical labour are paid in tho the shape of money capital.
(4) Increase in Per Capita income
Per capita income of a country increases with an increase in
the stock et capital goods o.g, machinery, equipment, buildings, social over
head capital (transport and communication) equipment for education, health,
housing etc.
(5) Increase
Growth Rate in Industry and Agriculture
The
provision of capital goods used in industry and agriculture sector increases
the productivity in these sectors.
(6) Increase in Supply
The
modern methods of production determine the number of goods and services in an
economy. Due to the bulk of capital goods, the supply of goods and services increases.
(7) Economic
Development
Capital results in technological discoveries and increased capital put the economy on the path to economic development.
(8) Employment Opportunities
The
employment opportunities are created due to more availability of capital and
unemployment problem can be removed.
(9) To Break V.C.P.
Due to increase in savings which leads to an increase in the volume of investment and productivity of all the sectors increases. It helps to break the V.C.P. by supply-side in LDCs.
(10) Expansion of Markets
By capital the formation, the purchasing power of the people increases. It helps to expand the
markets both at the national and international levels.
(11) To Correct B.O.P
Most of
developing countries are facing the problem of adverse balance of payments. By
adopting the import substitution policy, capital formation help
in building import substitution industries. The adverse balance of
payments can be corrected to decrease imports,
(12) To Reduce Foreign Debt
The debt burden of LDCs like Pakistan is increasing. Capital formation leads to reduce the
burden of foreign debt by adopting self-reliance policy.
(13) To
Control Inflation
By increasing the supply of goods and services through capital
accumulation will lead to control of inflation and stability in the economy.
(14) Exploitation
of Natural Resources
The natural resources are not fully utilized due to lack Of
Capital formation. By providing capital formation, the
natural resources are utilized or exploited to the maximum possible extent.
(15) Structural
Changes
The process of transformation of the existing traditional
structure of the economy to an improved one. This will help to increase employment
opportunities, labour productivity and improve the technology.
(16) To Improve Infrastructure
There is a lack of means of transport and communications, especially in rural areas of a developing country like Pakistan. Therefore, capital formation helps to improve the growth process in basic infrastructure facilities.
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