3.

Capital Formation

 Capital formation is a term used to describe the net capital accumulation during an accounting
period for a particular country. The term refers to additions of capital goods, such as equipment,
tools, transportation assets, and electricity.
 Capital formation means increasing the stock of real capital in a country.

Process of Capital Formation:

In order to accumulate capital goods some current consumption has to be sacrificed. The greater the extent
to which the people are willing to abstain from present consumption, the greater the extent that society will
devote resources to new capital formation. If society consumes all that it produces and saves nothing, future
productive capacity of the economy will fall as the present capital equipment wears out.

Process of Capital Formation:

Capital formation or accumulation undergoes three main stages:
(i) Creation of saving;
(ii) Mobilisation of saving; and
(iii) Investment of saving.

(a) Creation of Savings:

An increase in the volume of real savings so that resources, that would have been devoted to the production
of consumption goods, should be released for purposes of capital formation.

Sources of saving:
 Household
 The level of savings in a country depends upon the power to save and the will to save.
 It may be noted that savings may be either voluntary or forced.
 Business enterprises
 Government

(b) Mobilization of Savings:

A finance and credit mechanism, so that the available resources are obtained by private investors or
government for capital formation.

(c) Investment of Savings:

The act of investment itself so that resources are actually used for the production of capital goods.

4. Industrialisation and Urbanisation:

“Urbanization Continues After Industrialization Occurs”
 Industrialization has historically led to urbanization by creating economic
growth and job opportunities that draw people to cities. As industrialization creates
economic growth, the demand for improved education and public works agencies that are
characteristic of urban areas increases.