What do you mean by capital formation?

By Ritesh|Updated : September 6th, 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.

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

  • 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?

Capital formation means creating enormous capital goods, broadly divided into Change in the stock of raw materials, semi-finished products, Gross fixed capital formation, and finished products.

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