In the modern free-market economy, the process of capital formation consists of the following three stages: 1. An increase in the rate of real savings so that resources that would have been devoted to the production of consumption goods should be released for the purpose of capital formation. 2. Existence of a good financial system so that the available resources [...]
In order to raise capital formation in the economy we have first to raise ratio of surplus to capital or rate of surplus to national income and then measures have to be adopted to mobilize this surplus for purposes of productive investment. 1. Raising the Ratio of Surplus to Capital: In this connection the distinction between potential economic surplus and [...]
The following points highlight the three main stages of capital formation. The stages are: 1. Creation of savings 2. Conversion of savings into investment 3. The actual production of capital goods. Stage # 1. Creation of savings: Capital formation depends on savings. Saving is that part of national income which is not spent on consumption goods. Thus, if national income [...]