DEFINITION OF CAPITAL AND ITS FORMATION

Every society needs one form of capital or the other, if not all, for its economy development. No economy can progress without making adequate arrangement in its capital formation. According to Levacic (1982), capital is the accumulation of wealth, which must be combined with other factors of production. In the same light, Jhingan (1997) sees capital as the combination of material and human that result in the products for final consumption. If these definitions of capital are things to go by, then capital must be vital in the life of every economy. This unit throws light and explains in detail definition of capital and its formation.

 OBJECTIVES

At the end of this, you should be able to:

• explain the concept of capital formation 
• explain importance of capital formation 
• explain reason for low rate of capital formation 
• mention sources of capital formation. 

 Concept of Capital Formation

In both developed and developing economies, emphasis is laid on the formation of capital as the critical determinant of economic growth. No society directs her whole resources into the productive sector; rather part

of it is directed to the formation of capital goods, which will be further channelled into further production. These capital goods include tools, machines, plant and equipment. This means that business has to postpone, deferred her present consumption in favour of the accumulation of capital to further increase, or expand her consumable goods in future, such that her income increases.

This argument has supported by Kuznet that the domestic capital formation should be such that it will not only add to the constructions, equipment and inventories of a country but also to other expenditure (except those necessary to sustain output at existing levels). He sees the deferment of present consumption in form of capital formation will display outlays on education, recreation and material luxuries, which will contribute to the health and productivity of individuals and raise their morale. Therefore, businesses need to defer the consumption of the present profit and plough it back to the business so that it could expand and increase it output hence brings about better profits.

 Importance of Capital Formation

• Capital formation (or accumulation of wealth) is one of the most important and principal factors in economic development. Most economists believe that the vicious circle of poverty can be broken with the formation of capital. This they believe that the formation of capital leads to optimum utilisation of available resources, increase in output, income and employment which will solve the problem of inflation balance of payments deficit and relief a country of burden of foreign debts and a better domestic commerce. These indices (listed below) are blocks to any reasonable business that can be embarked upon domestically. 
• Capital formation builds up capital equipment in almost all, if not all, sectors of the economic, which raises the domestic savings and investment capacities of both the buyers and sellers of goods. 
• Capital formation dispenses (distributes) to businesses, depending on loans from banks or friends, cash to expand in businesses. 
• Capital formation brings more money to the investors, which will lead to establishment of different types of industries, increase levels of income and satisfaction of human wants. This will also raise the standard of living of the people and the economic welfare of business owners will increase. 
• Capital formation does not only solve the problem of business owners, but also the principal solution to the complex problems of underdeveloped countries in general.