What Are The Internal And External Factors Of Capital Formation?

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Savings are the major determinant of capital formation savings are of two types. Personal savings refer to the amount saved by households, while business savings are the undistributed profits of the businesses. Personal savings form the major part of the total savings in a country. Capital market consists of stock exchanges, financial institutions, and investment agencies etc. efficient capital market induces more investment and it is vital for capital formation. Investment, especially in capital good industries, is essential for increasing the capital stock in a country. For more investment in a country government should provide proper facilities and incentives to investors.

Stock of capital in a country can also be increased through government borrowing. Govt. of a country can mobilize unutilized savings by selling securities and bonds of various denominations. The funds so generated can be invested to increase the stock of capital in a country. Many countries firms and multi national companies make investment in countries. Usually they invest in heavy industries such as fertilizers and chemicals, automobile industries etc. there are different specialized international financial institutions who provides loans to members countries.

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