Sources Of Capital Formation

Sources Of Capital Formation

In a broader sense, it includes abnormal capital or human resources consisting of public health, efficiency, professionalism, and visible and invisible capital.

According to Professor Colin Clarke, capital goods "are reproducible wealth used for production purposes, but capital formation refers to the net addition to the existing capital stock in a given period of time." He says capital formation means sacrificing immediate consumption to get more consumer goods in the future, while "capital" is the part of the current product that is used to increase production instead of consumption immediately.

Here, we must make a clear distinction between "keeping capital unchanged" and "capital formation". This process is known as capital preservation as it is when resources are used to replace obsolete assets, including machinery erosion, as they do not increase the productive capacity of the economy.

On the contrary, capital formation refers to an increase in real capital that clearly helps raise the level of production of goods and services. Therefore, the essence of capital formation is to shift part of the resources currently available from society towards the potential expansion of the consumed product in the future.