What Is Capital Formation?

Capital formation is the net capital accumulation during an accounting period for a particular country. The term refers to additions of 澳洲幸运5官方开奖结果体彩网:capital goods,ℱ such as equipment, too♉ls, transportation assets, and electricity.

Understanding Capital Formation

Countries need capital goods to replace the older ones that are used to produce goods and services. If a country cannot replace capital goods as they reach the end of their 澳洲幸运5官方开奖结果体彩网:useful lives, production declines. Generally, the higher the capital formation of an economy, the faster 🌜an economy can grow its aggregate income.

Producing more goods and services can lead to an increase in national income levels. To accumulate additional capital, a country needs to generate savings and investments from household savings or based on government policy. Countries with a high rate of household savings can accumulate funds to produce capital goods faster, and a government that runs a surplus can invest the surplus in capital goods.

Example of Capital Formation

Caterpillar is one of the largest producers of construction eq♌uipment in the world. It produces equipment that other companies use to create goods and services.

Caterpillar (CAT) is a 澳洲幸运5官方开奖结果体彩网:publicly traded company and raises funds by issuing stock and debt. If household savers choose to purchase a new issue of Caterpillar 澳洲幸运5官方开奖结果体彩网:common stock, the firm can use the proceeds t♒o increase production and develop new products for the firm’s customers.

When investors purchase stocks and bonds issued by corporations, the firms can put the capital at risk to increase production and create new innovations foꦆr consumers. These activities add to the c꧅ountry’s overall capital formation.

Reporting on Capital Formation

澳洲幸运5官方开奖结果体彩网:The World Bank works as a source of financial and technical assistance to developing countries, with an aim to end extreme poverty through its programs. The World Bank tracks gross capital formation, which it defines as outlays on additions to 澳洲幸运5官方开奖结果体彩网:fixed assets, plus the net change in 澳洲幸运5官方开奖结果体彩网:inventories. Fixeꦡd assets include plants, machinery, equipment, and buildings, all used to create goods and services. Inventory includes raw materials and goods available for sale.

The World Bank measures capital formation by assessing the change in net savings. If the household ꦆsavings rate is increasing, savers may invest additional dollars and purchase stocks and bonds. If more households are saving, the country may report a cash surplus, which is💫 a positive sign for capital formation.

The World Bank also reports the amount of government debt that a country’s central government has outstanding, compared with the country’s 澳洲幸运5官方开奖结果体彩网:gross domestic product (GDP), which is the total of all goods and services produced by a country. If a country’s rate of capital formation increases, so does the country’s GDP.

The Bottom Line

Capital formation is a key measure of a country’s economic health. Boosting production and investment tends to result in the population becoming better off and having more money to spend, which helps to drive 澳洲幸运5官方开奖结果体彩网:economic growth.

In theory, an economy with high capital formation should keep growing, reinvesting its gains to accrue more of them—at least as long as 澳洲幸运5官方开奖结果体彩网:inflation is kept at reasonable levels.