Capital Formation: Meaning & Process
Meaning of Capital formation
Capital formation refers to the process of increasing the stock of real capital in the country. In other words, capital formation involves making more and more capital goods.
In narrow sense, it can be defined as the expenditure on fixed capitals such as machines, tools, equipment, etc. over a period of time. It means that capital formation includes investment in physical or material capital only, which leads to an increase in the material capital goods. However, in wider sense, capital formation includes investment in human capital along with material capital. Capital formation is also known as the capital accumulation.
The economic development of a country significantly depends upon the availability of capital stock with it. The higher rate of capital formation enables the economy to produce a large volume of goods and services which in turn, increases the national income or output. Thus, capital formation leads to industrialization, reduction in cost of production, economic welfare, and so on.