Capital formation is used in the context of macro economics, in simple words capital formation refers to transfer of savings of individuals to the corporate sector, in other words it implies transfer of resources to those who need it, from those who do not need it. Capital formation is very important as it plays a major role in the development of an economy. Let’s look at some more points which make capital formation an indispensable thing for any country if it wants to grow –
1. It helps the country to become self sufficient in the sense that country does not have to rely on foreign investments, since saving of individuals gets converted into investments.
2. Since capital formation brings economic growth it increases the overall living standard of the people of the country which is important for any country.
3. In the long run due to capital formation a country can even export high quality goods at globally completive rates, which is again a boost for the economy of the country.
4. Due to capital formation a country can make better use of the natural resources for the benefit of itself and for the rest of the world.
5. Capital formation is a boon for both companies and employees, because companies can get finance for expansion at cheaper rates and due to that expansion there are more job opportunities for workers, hence a win – win situation for both the parties.
As one can see that government of any country cannot afford to ignore capital formation, as it is vital for the development of an economy as people of the country.