What do you Mean by Capital Formation?

By Ritesh|Updated : November 20th, 2022

Capital formation means creating more capital goods such as heavy machinery, factories, infrastructure, production of more electricity, etc. Capital is the most crucial factor of production, especially in a developing economy. Macroeconomics, national accounts, and financial economics all use the concept of capital formation. It is occasionally used in corporate accounts as well.

Capital Formation in Economic Development

Capital formation is the portion of a nation's current production and imports not consumed or exported during the accounting period. The total capital formation can be broadly divided into two categories as follows:-

  • Gross fixed capital formation
  • Change in semi-finished products, stock of raw materials, and finished products.

Function:

The Capital Formation Section prepares estimates of gross fixed capital formation of the State of Haryana for all sectors of the economy at current and constant prices on an annual basis as per-

  • Industry use
  • Type of institutions
  • Asset type

A report on Haryana's gross fixed capital formation is produced every year. It estimates capital formation's importance.

It is helpful for planning and economic growth because it reflects:

  • Increasing the economy's capital base
  • Modifications in manufacturing capacity and modes.

Sets the stage for:

  • Choosing and evaluating policy for resource mobilization
  • Allocation of resources
  • Evaluation of the economy's growth potential.

Compilation of Gross Fixed Capital Formation

Estimates of gross fixed capital formation at the state level are processed in current and constant prices

  • By type of use: In this category, the economy is divided into 13 sectors for estimating gross fixed capital formation
  • By asset type: Gross fixed capital formation estimates are divided into six categories.
  • By various institutions: Estimates of gross fixed capital formation are calculated.

Summary:

What do you Mean by Capital Formation?

Gross fixed capital formation, which includes the production of finished goods such as heavy machinery, factories, infrastructure, production of more electricity, etc. as well as the change in the stock of raw materials and semi-finished goods, is referred to as capital formation.

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