What is Capital Formation?

Capital formation is an important indicator of the scale of net investment in fixed capital in Western countries. Net investment in capital assets (investments such as plant, equipment, vehicles, etc.) over a period of time. It is equal to the new capital added to the total investment in capital assets after depreciation and other tangible losses over a period of time. Capital formation is the basis for future production expansion and will have a great impact on economic development. ^[1]

Capital formation

Harold-Domar Model

British Economist

Capital formation originates from production surplus

The way capital is formed is the mechanism or channel through which savings are converted into investments. Throughout the industrialization experience of advanced countries, there are six main ways of capital formation:

(1) Mobilize agricultural surplus by administrative or economic means;

(2) Use

The result of capital formation is the production of physical means of production (machines, equipment, buildings, and other infrastructure). The size and structure of these physical capitals reflect the production capacity of a country, and also form the basis for future economic development. If the developing countries can successfully solve the capital problem, they will be able to achieve rapid economic development and get rid of poverty and backwardness as soon as possible in cooperation with their rich natural resources and labor and other production factors. ^[3]