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Class : 11
Unit : Economics

Explain the process of capital formation.

Ans : The process of capital formation are explained below: i) Creation of saving:- Saving is the first stage of the process of capital formation. Saving is that part of income which is not consumed. Saving depends upon income. As the income increases saving also increases. However, the amount of saving or the creation of saving depends upon various factors such as income, ability to save and willingness to save. ii) Ability to save:- Higher the income, higher will be saving. Saving capacity depends upon reducing the unnecessary consumption. So if saving capacity is large, there will be more capital formation. iii) Willingness to save:- Willingness to a desire of people to save out of their income. So if people willingness to save increases, it helps to increase the rate of capital formation. iv) Mobilization of saving:- Only saving is not enough for capital formation the mobilization of saving means transferring of saving to business or entrepreneurs who require them for investment. The bank, insurance companies, financial institution etc. are the act for the mobilization of saving. These institutions accept the saving and give loan to the investor. v) Investment of saving:- For effective capital formation the saving must be invested in productive sector such as agriculture, manufacturing industries, education, health, communication, banking etc. so as to create new capital.