Question

Explain three important stages of capital formation.

Briefly discuss the process of capital formation.

What are the three different stages of capital formation?

Answer 1

Three important stages of capital formation:

1. Generation of saving: Savings provide necessary resources for the production of capital goods. So the first stage of capital formation is the generation of savings. Savings by people depend on
   1. ability to save
   2. willingness to save and
   3. opportunity to save.
2. A mobilisation of savings: Although with a high level of income, if a person holds savings in the form of cash instead of depositing in the bank, then the savings cannot be mobilised for investment. Hence, the savings must be mobilised from the savers. The capital markets, as well as financial and other institutions, perform these tasks.
3. Investment of savings: The mobilised savings must be actually used by producers for investment. Money kept by the people in the banks must be lent out by the banks to producers for business investment such as the purchase of machinery, raw materials, etc.