Question

Explain any three significances of capital formation in an economy.

Answer 1

Three significances of capital formation in an economy are as follows:

1. Capital formation helps in increasing production and productivity: Capital is vital in increasing national output. Continuous capital formation provides a steady increase in national production since it increases the country's productive potential through the creation of new assets.
2. Creation of employment opportunities: With population growth, the demand for work possibilities rises, and if this need is not satisfied by an adequate increase in capital stock to provide employment to additional labour force, unemployment rises. Capital formation increases the stock of capital, which increases an economy's production and productive capacity by producing additional job opportunities.
3. Helps in Human Capital Formation: Human requires capital formation to function. In the country, capital formation. Human capital formation is dependent on the quality of social capital such as educational institutions, hospitals, libraries, low-income housing and social security, among other things.