Process of Capital Formation

The process of building up the necessary stock of capital equipment requires huge resources for financing it. Either a part of national income must be saved for the production of capital goods or the necessary funds for the purpose must be borrowed from abroad. The various methods of financing economic development. Will be discussed in detail in a separate section. A here we may only emphasize that domestic saving is a sine qua non of capital formation. In fact, prof Arthur Lewis has defined the process of economic growth as one of transforming a country from a 5 percent to a 15 per cent save. But savings though necessary are not sufficient for the purpose of capital formation , which involves the flowing three independent activities

1)  An increase in the volume of real savings esthete resources that would have been used for consumption purposes may be released for the purpose of capital formation

2) A finance and credit mechanism , so the the available resources may be availed of by private investors or government for capital formation and

3) The act of investment itself , so that resources are used for the production of capital goods.