Skip to main content

Capital Formation

Capital Formation >> Microeconomics Assignment

Economic growth depends on several factors. But the two most important factors that determine rate of economic growth are capital accumulation is essential for accelerating rate of economic growth. They need to build roads, factory buildings, machines and tools, tractors, means of irrigation, communication networks and transportation system. To produce more capital goods and build infrastructure, a society has to sacrifice some of its current consumptions. The same is true of making technological progress. Technological changes come from research and development that also required resources. The resources that have to be used for building and making technological advances have to come from the cutting the current production of consumer goods. In fact, the cut in the problem of capital formulation we have to construct such a production possibility curve in which on one axis capital formulation we have to construct such a production measured.

This has been done along the X-axis consumer goods and along the Y-axis capital goods are measured. If the economy is allocating the available resources between capital and consumer goods in such a way that it operates at a point A on the production possibility curve PP, it will be producing OC of consumer goods and OK of capital. Now suppose the society decides to provides more of capital goods. To implement this decision society will have to withdraw some resources from the production of consumer goods will decline. It is clear that if the economy reallocates its resources between consumer and capital goods and shifts from point A to point B on the dependence of production possibility curve PP it will now produce OK2 of capital goods and OC2 of consumer goods has to be reduced.

For poor developing countries where a large part of population is very poor it is difficult to reduce the production of consumer goods such as food and clothing to devote the resources so released for the capital accumulation. Thus the poor developing countries face the dilemma. While progress there is a urgent need to accelerate capital formulation and technological progress they are too poor to release resources by curtailing consumption.

However the evidence of the last half a century shows that with active role of government raising resources through taxes and other means and also getting foreign aid and investment some developing countries have in fact succeeded in accelerating capital formulation and achieving higher rate of economic growth.  

Comments

Popular posts from this blog

Improvement and excellence in Higher Education

A lot is varying in higher education. Most essentially, apprentice themselves are changing. Subsequent to long decades of ruling out, college access has extended opportunities for minority students, first-generation students and low-income students. In this year students are more probable to attend community college than any other postsecondary alternative and more probable to be older and living away from campus and may be joining part-time while balancing work as well as family. The symbolic picture of an 18-year-old high school graduate walking across a blossoming campus toward her dorm room no longer reflects the actuality of today’s college student. Institutions of higher education are act in response to these changes, partially by making course delivery more pliable. Technology has prepared this even further possible, introducing teaching as well as learning that is less forced by time and place. Technology is as well making new kinds of embedded assessment and adaptive curriculu...

Awesome Ways To Kick-Start Your Creativity

     The brain power is exhausting so much on paper, projects and exams, that’s typical for our well of creativity to run dry and if it does then it’s essential to identify how we can restock it by motivation to reignite that creative spark. Tutorsglobe is releasing pressure of these hectic schedule providing extremely talented tutor's service.             Have you experienced writer’s block, suffered through a dry spell or had your creativity completely flat line? There is don’t matter what profession you’re in or where you are in life, there will be times when your capability to make something new hits the wall. every and any creative juices that were once flowing dry up and you find yourself struggling to create something… just anything.              Brain impairment can affect at any time and in any situation, but generally bring up its ugly head when t...

Contribution of Quantitative Techniques to Managerial Economics

 Contribution of Quantitative Techniques to Managerial Economics   Mathematical Economics and Econometrics are utilised to construct and estimate decision models useful in determining the optimal behaviour of a firm. The former helps to express economic theory in the form of equations while the latter applies statistical techniques and real world data to economic problems. Like, regression is applied for forecasting and probability theory is used in risk analysis. In addition to this, economists use various optimisation techniques, such as linear programming, in the study of behaviour of a firm. They have also found it most efficient to express their models of behaviour of firms and consumers in terms of the symbols and logic of calculus. Thus, Managerial Economics deals with the economic principles and concepts, which constitute 'Theory of the Firm'. The subject is a synthesis of economic theory and quantitative techniques to solve managerial decision problems. It is rn...