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Q102 (UPPCS/2021) Economy › Basic Concepts & National Income

With reference to the 'Capital formation' which of the statements is/are correct ?
1. Process of capital formation depends on savings and effectiveness of financial institutions.
2. Investment is the essential factor of capital formation.
Select the correct answer using the codes given below.
Codes :

Explanation

Capital formation refers to the net addition to the physical stock of capital in an economy during an accounting period. It represents the process of building up the stock of real assets like machinery, buildings, and infrastructure.

  • Statement 1 is correct: The process of capital formation involves three essential stages: the generation of savings, the mobilization of those savings through financial intermediaries (like banks and capital markets), and the final act of investment. The effectiveness of financial institutions is crucial for channeling idle savings into productive economic activities.
  • Statement 2 is correct: Investment is the functional part of capital formation. While savings provide the necessary funds, capital formation only occurs when these funds are actually spent on creating new capital goods. Thus, investment is the essential factor that transforms financial resources into physical capital.
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