Capital formation means increasing the real stock of capital of a country. It is the process of building up the capital stock of a country through investment in productive plants and equipment.
Capital formation refers to the increase in the productive capacity of the economy over a period of time. It involves making more capital goods like machines, tools, etc. which are used for further production.
Capital formation is the process of building up the capital stock of a country through investing in productive plants and equipment. It involves the increase of capital assets by efficient utilization of the available material and material and human resources of the country.
Process of Capital Formation
Capital formation involves three crucial steps. The three stages involved are discussed below:
1. Creation of Savings
Savings are done by individuals and households. Business enterprises save by retaining a part of them in the form of undistributed profits. Individuals and households save by cutting down consumption.
When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.
― John Maynard Keynes
2. Mobilization of Savings
Savings are done by individuals investors, banks, investment trust, insurance companies, finance corporations, governments, etc A well-developed capital market will ensure that the savings of the society are mobilized and transferred to the entrepreneurs or businessmen who require them.
3. Investment of Savings
For savings to result in capital formation, they must be invested. In order that the investment of savings should take place, there must be a good number of honest and dynamic entrepreneurs in the country who are able to take risks and bear the uncertainty of production.