Role of capital

accumulation in the
economic growth
 Much economic development is not
possible without making and using of
industrial machinery, making of
agricultural tools and implements,
building of dams, bridges, factories,
roads, railways, airports, ships, ports,
harbours, etc., which are all capital. All
these capital goods are man-made
instruments of production and
increase the productive capacity of the
economy.
 Capital per worker rises when the rate of
capital accumulation is greater than the rate
of population growth. With the increase in
capital per worker, productivity per worker
will increase with the result that national
product and income will increase. Therefore,
capital accumulation, by increasing the
productivity of the workers, plays an
important role in the growth of the
economy.
 Another way in which capital
accumulation contributes to growth is
that it makes the technological
progress of the economy possible.
 Another important economic role of
capital formation is the creation of
employment opportunities in the
country. Capital formation creates
employment as two stages. First, when
the capital is produced, some workers
have to be employed to make capital
like machinery, factories, dams,
irrigation works, etc. Secondly, more
men have to be employed when capital
has to be used for producing further
goods.
sources of Capital Accumulation
 Savings
 Taxes
 Government Borrowings
 Use of Idle Resources
 Deficit Financing
 Foreign Aid
Measures to promote
capital accumulation
 Increase in Financial Instituitions
 Incentive to people
 Investment Opportunities
 Increase in Taxes
 Restriction on Imports
 Increase in Exports
 Cut in Unproductive Expenditures
 Use of Foreign Aid
 Increase in Employment
 Increase in Foreign Investment
 The greater the amount of
resources that are invested in
production of capital goods, the
smaller quantity of resources will be
left for the production of consumer
goods. Thus, greater accumulation and
therefore greater rate of economic
growth comes at the cost of present
consumption.
 In Harrod-Domar models of
economic growth as well as Lewis’
model of “economic development with
unlimited supplies of labour”, capital
accumulation plays a crucial role in
raising both output and employment.