Capital formation is a term used in national accounts statistics

and macroeconomics. It basically refers to the net additions to the

(physical) capital stock in an accounting period, or, to the value of the
increase of the capital stock; though it may occasionally also refer to
the (growth of the) total stock of capital formed.

Thus, in UNSNA, capital formation equals fixed

capital investment, the increase in the value of inventories held, plus
(net) lending to foreign countries, during an accounting period. Capital
is said to be "formed" when savings are used for investment purposes,
often investment in production

Concepts of Capital Formation:

 Firstly, capital formation is frequently thought of as a measure of

total "investment", in the sense of that portion of capital which is
actually used for investment purposes and not saved or consumed.
But in fact the concept refers only to the accounting value of
the additions of assets to the capital stock less the disposals of
assets; and often capital formation is used to refer only to
investment in fixed assets, not investment in all types of assets.
"Investment" includes investment in all kinds of capital assets,
whether physical property or financial assets.

 Secondly, capital formation may be used synonymously with the

notion of capital accumulation in the sense of a reinvestment of
profits into capital assets. But "capital accumulation" is not an
accounting concept, and contains the ambiguity that an amassment
of wealth could occur either through a redistribution of capital
assets from one person or institution to another, or through a net
addition to the total stock of capital in existence. As regards capital
accumulation, it can flourish, so that some people get much
wealthier, even although society as a whole becomes poorer, and
the net capital formation decreases. In other words the gain could
be a net total gain, or a gain at the expense of loss by others which
cancels out (or more than cancels out) the gain in aggregate.
 Thirdly, capital formation is often used synonymously with Gross
fixed capital formation but strictly speaking this is an error, for two
reasons: (a) capital formation as such can in principle refer to more
assets than just fixed capital, and (b) capital formation can be
stated "gross" (before deduction of depreciation write-offs
or Consumption of fixed capital) or it can be stated "net" (after
deduction of depreciation charges). So, capital formation could
mean gross capital formation or net capital formation.