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Question
Explain two factors on which the capital formation of a country depends.
Solution
The process of capital formation involves three stages:
- Generation of Savings: Savings provide necessary resources for the production of capital goods. So the first stage of capital formation is the generation of savings. Savings by people depend on
- ability to save
- willingness to save
- opportunity to save.
- Mobilization of Savings: Savings generated in the economy need to be mobilized for investment. Therefore, it is essential that savings of the people are mobilized for undertaking investment.
- Investment of savings: The final stage in the process of capital formation is investment. Investment is affected by two factors: the rate of interest and the expected profit from the investment. The lower the rate of interest, the greater the willingness to borrow and invest. expected rate of profit from new investment also determines the level of investment.
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