What is Capital Accumulation? Discuss the factors that influence Capital accumulation
Capital
formation or capital accumulation means the increase of the stock of real in a
country. In other words, capital formation involves making more capital
goods, such as machines, tools, factories, transport, equipment, materials,
electricity, etc., which are used for the further production of goods. For making an addition to the stock of capital savings investments and technical progress are
essential. Capital accumulation is the very core of economic development. It may
be a predominantly private enterprise system like the American one or a socialist
economy like China and Cuba . Economic development cannot take place with technical progress
such as the construction of irrigation works, the production of agricultural tools
and equipment and reclamation, the building of dams, bridges, and factories with
machines installed in them, roads, railways and airports, ships and harbors,
all the produced means of further production associated with high-level
productivity. In the view of many economists, capital formation occupies the
central and strategic position in the process of economic development.
Factors
influencing Capital Formation:
Capital
formation is not an automatic process. The rate of capital formation is
different in different countries. This shows that capital formation is
conditioned by certain factors. The following are the chief factors that govern
capital formation in a country.
(a) Saving Creation: Savings are done by
individuals or households. They do savings by not spending all their income on
consumer goods. When individuals or households save they release resources from
the production of goods. Workers' natural resources, materials, etc. thus released
are made available for the production of capital goods.
A high rate of
savings is possible if people are prepared to put forth the effort to maximize
output even with the resources available and are willing to keep down their
expenditures within reasonable limits. In other words level of savings in a
country depends upon the power to save and the will to save. The power to save
or the saving capacity of an economy mainly depends upon the average level of
income and the distribution of national income. The greater the level of income greater
will be the amount of savings. Another source of savings is government. The
government savings constitute the money collected as taxes and profits made by the state undertakings i.e. government enterprises. Foreign trade constitutes
third source of savings. Foreign trade is easily amenable to State control for
revenue and other purposes.
(b) Mobilizing of Savings: Next step in
process of capital formation is that the savings of the household must be mobilized
and transferred to businessmen or enterprise that requires them for investment.
This stage depends on the efficiency of machinery for the collection of savings
viz, the capital market, banks, insurance companies, etc.
(c) Channelising Savings into investment: For
savings to result in capital formation, they must be invested. In order that
investment of savings should take place, there must be a good number of honest
and dynamic entrepreneurs in a country who are able to take risks and bear the uncertainties of production. Given that a country has got enough good and
venturesome entrepreneurs, the investment will be made by them only if there is
sufficient inducement to invest. Inducement to invest depends on the marginal efficiency
of capital i.e. progressive rate of profit on the one hand and rate of interest
on the other hand.
(d) Foreign Capital: Capital formation in a
country can also take place with the help of foreign capital or foreign
savings. Foreign capital can take the following form.
(i) Direct
private investment by foreigners.
(ii) Loans or
grants by foreign governments and
(iii) Loans by
international agencies like World Bank.
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