Q-13= Why capital formation is important for economic development
IMPORTANCE OF CAPITAL FORMATIONCapital formation consists of both tangible items like plants, tools and machinery and intangible items such as high standard of education, health and scientific research. It is the process of adding to the net physical capital stock of an economy in an attempt to achieve greater output. The rate of accumulation of an economy’s physical stock of capital is an important determinant of the rate of growth of an economy. It creates productive potential for future production. It has three stages namely savings, existence of financial institutions and capital market for mobilization of savings and thirdly actual investment in capital goods. Capital formation results in increase in employment opportunities increase in output of goods and services and the use of new and most modern technology.
Following is the importance of capital formation:
1. Vicious circle of poverty is broken
2. Increase in productivity
3. Market expansion
4. Increase in export earnings
5. Technological development
6. Increase in employment
7. Decrease in general price level
8. Improvement in health and education facilities
9. Increase in the pace of industrialization
10. Increase in the economic growth rate
Capital formation results in overall improvement of economy. With the inc rease in machine and equipment total output increases, hence national income increases. Increase in national income results improvement in per capita income. This increases purchasing power and standard of living of masses. Since output of goods and services increases, price level goes down, which in turn increases welfare of the people. Employment opportunities also increase. Due to increase in local production, foreign imports are reduced, which in turn reduces burden on foreign exchange payments, rathe r balance of payments is improved. Since capital formation is carried on in all sectors of economy, including health, education and technical training facilities, the work-efficiency of manpower increases. In nutshell Capital formation quickens the pace of economic growth of the country.
IMPORTANCE OF CAPITAL FORMATIONCapital formation consists of both tangible items like plants, tools and machinery and intangible items such as high standard of education, health and scientific research. It is the process of adding to the net physical capital stock of an economy in an attempt to achieve greater output. The rate of accumulation of an economy’s physical stock of capital is an important determinant of the rate of growth of an economy. It creates productive potential for future production. It has three stages namely savings, existence of financial institutions and capital market for mobilization of savings and thirdly actual investment in capital goods. Capital formation results in increase in employment opportunities increase in output of goods and services and the use of new and most modern technology.
Following is the importance of capital formation:
1. Vicious circle of poverty is broken
2. Increase in productivity
3. Market expansion
4. Increase in export earnings
5. Technological development
6. Increase in employment
7. Decrease in general price level
8. Improvement in health and education facilities
9. Increase in the pace of industrialization
10. Increase in the economic growth rate
Capital formation results in overall improvement of economy. With the inc rease in machine and equipment total output increases, hence national income increases. Increase in national income results improvement in per capita income. This increases purchasing power and standard of living of masses. Since output of goods and services increases, price level goes down, which in turn increases welfare of the people. Employment opportunities also increase. Due to increase in local production, foreign imports are reduced, which in turn reduces burden on foreign exchange payments, rathe r balance of payments is improved. Since capital formation is carried on in all sectors of economy, including health, education and technical training facilities, the work-efficiency of manpower increases. In nutshell Capital formation quickens the pace of economic growth of the country.