Question

Explain any three factors which affect capital formation.

Answer 1

The factors affecting capital formation are as follows:

1. Monetary Policy - The monetary policy pursued by the government also constitute an important factor affecting capital formation in the country. While this policy, by itself does not act as sources of capital formation, it acts as factors affecting the sources. A higher interest rate on savings is very important for raising savings.
2. Income Tax Policies - To raise the rate of capital formation in the country by raising interest rates can succeed only when the cause of low investment is due to low savings. One popular method is to grant income tax benefits to people who wish to save (for instance, by exempting from income tax that part of income which is saved).
3. Commodity Taxation - Commodity taxation can also be used to raise the rate of savings. If items of consumption-especially items of luxury consumption are subjected to high rates of sales taxes, this will raise the prices of the consumption goods (because the sales taxes are added to the prices of the goods). This will reduce consumption in the country. Naturally, savings will increase if income remains unchanged.