Capital

Accumulation and
its Significance
Capital Accumulation
– According to Prof. Colin Clark, capital goods “are reproducible wealth used for purpose of
production. But capital formation refers to the net addition made to the existing stock of
capital in a given period of time.” 
– The quote Prof. Nurkse, “The meaning of capital formation is that society does not apply
the whole of its productive activity to the needs and desires of immediate consumption
but directs a part of it to make capital goods, tools and instrument, machines and
transport facilities plant and equipment—all the various forms of real capital that can
so greatly increase the efficiency of productive effort.”
– According to Prof. Simon Kuznets, “Domestic capital formation would include not only
additions to construction, equipment and inventories within the country, but also other
expenditure expect those necessary to sustain output at existing lands.
– It would include outlays on education, recreation and material luxuries that contribute to
the health and productivity of individuals and all expenditures by society that serve to
raise the morale of employed population.”
– American economist Simon Smith Kuznets (1901-1985) pioneered the concept of capital
formation in the 1930s and 1940s. Kuznets was awarded the 1971 Nobel Memorial Prize
in Economic Sciences.
– Capital involves man-made made equipment that is used to make other goods such as
machines and factories.
– Capital accumulation will need to exceed the amount of capital necessary to overcome
depreciation. i.e. some capital wears out, so capital investment is necessary to
overcome this.
– Capital accumulation involves additional purchases of capital.
– Capital formation also refers to the issue of new securities, which occurs in the primary
market. In this context, ‘new securities’ refers to shares and bonds.
Definition
Definition of Capital accumulation
– This is the process of acquiring additional capital stock which is used
in the productive process
Capital accumulation can involve

– Investment in physical fixed capital (e.g. factories, machines)

– Portfolio investment – purchase of bonds, shares and
cryptocurrencies
– Investment in assets, such as housing
– Capital formation refers to the increase in the stock of real capital in an economy during
an accounting period. In other words, the creation of things that help us produce more.
We commonly used the term in the study of macroeconomics. The term capital
accumulation has the same meaning.
– Capital accumulation involves the creation of more capital goods. For example, buildings,
equipment, tools, machinery, and vehicles are capital goods. We use capital goods to make
products and provide services.
– In economics, capital means the factors of production that we use to create goods.
– A country uses capital stock together with labour to produce goods. Capital accumulation
occurs when this capital stock increases.
– The greater the capital accumulation of an economy is, the faster it can grow its aggregate
income.
– When a country’s capital stock increases, its capacity for production grows too. In other
words, the economy can produce more. When we produce more, national income levels
subsequently rise.
 Measuring capital accumulation
– From the 1950s, most countries began using it to measure capital flows
– Economists say that the formation of capital is an essential way of assessing the true
financial state of a country
– In fact, without it economists would find it extremely difficult to identify the rate of
GDP growth. GDP stands for Gross Domestic Product

Capital accumulation can be calculated by measuring:

– Change in wealth/value of assets in an economy.
– Level of gross fixed capital formation – depreciation
Process of Capital Formation

Capital formation or accumulation undergoes three main stages:

– (i) Creation of saving;

– (ii) Mobilisation of saving; and
– (iii) Investment of saving.
Both saving and investment are crucial for capital accumulation

– The process of capital accumulation presupposes that national income (Y) in a given
period of time should exceed the level of consumption (c)
– The income (Y) is divided between consumption and saving, i.e., Y = C + S
– We are also familiar that income is equal to expenditure, Y = E
– Similarly, expenditure can be divided into consumption expenditure (c) and
investment expenditure (I).
– Since Y = E and C + S is equal to C + I.
– In other words, S = I.
excess of national income over consumption constitutes saving of the community
which is investment.
From this the relationship between investment (I) refers to investible surplus while
capital formation is the net addition to the existing stock of capital.
If any part of the investible surplus is used for the production of consumer goods, it
fails to form capital formation.
the value of capital formation may not be equal to the value of investible surplus in a
given period.
the pre-condition for capital formation is the positive
it does not guarantee for capital formation
Even then, it can be raised by transferring investible resources in the production of
consumption goods to the production of capital goods
How capital accumulation occurs
– Profit from business can be reinvested
– Foreign direct investment (important for developing economies with
low capital basis)
– Technological innovation which increases the productivity of capital.
– Increase in human capital – e.g. better educated workforce enables
an increase in production possibility frontier.
– Discovering new sources of raw materials, e.g. oil reserves.
– Increased level of savings.
– In the Harod-Domar model of economic growth, a higher proportion
of income that is saved – enables more investment and higher rates
of economic growth. (Though Keynesians note that higher savings
are not always invested – but can be saved without investment)
Capital accumulation and inequality

– Capital accumulation often occurs from the profit or dividends from

previous investment.
– Capital accumulation can become a self-reinforcing cycle – with the
wealthy able to increase their capital assets, enabling more
profit/rent/dividends to finance further capital accumulation.
Marxist views of capital accumulation

– The Marxist view of capital accumulation concentrates on how profit

from business is reinvested in more capital
– Enables capitalist to increase their wealth and dominance of society
– Also believed that capitalism was prone to crisis as there would be
times when profit was greater than projects capitalist could invest in
– The modern-day economist,
– Thomas Piketty argues that, unchecked, the process of capital
accumulation can lead to rising inequality in society.

– He notes capital doesn’t have to be invested in business but can be

invested in other assets, such as housing, shares, bonds.
– As a general rule,
– Picketty argues wealth grows faster than economic output
– He uses expression r > g (where r is the rate of return to wealth and
g is the economic growth rate.
– This is mainly due to the process of capital accumulation and the
fact assets give a rate of return which can be re-invested.
Ricardo and capital accumulation

– Ricardo’s model of economic growth placed a high value on capital

accumulation
– Capital accumulation came from profit and the willingness and
ability of owners to invest in more capital
Capital Accumulation and Diminishing Returns
– Growth models based on Solow’s models argue that increasing the
capital stock can soon lead to diminishing returns
– They argue that economic growth is fundamentally determined by
population growth and technological innovation

Capital Accumulation and Endogenous Growth Models

– Endogenous growth models hold that capital accumulation can
increase the long run trend rate of economic growth
– To permit capital accumulation it is necessary to increase the savings
ratios
Capital Accumulation Plans
As a means for developing countries to increase their long term
growth rates

To increase capital accumulation, it is necessary to:

– Increase savings ratios
– Maintain good banking system and system of loans
– Avoid corruption
– Good infrastructure to make investment more worthwhile
Significance of Capital Formation in Economic Development

– key factor in economic development of an economy

– The vicious circle of poverty, according to Prof. Nurkse, can easily be
broken in under developed countries through capital formation
– Accelerates the pace of development with fuller utilisation of
available resources.
– Leads to an increase in the size of national employment, income and
output
– Thereby the acute problems of inflation and balance of payment can
be solved
Significance
– 1. Formation of Sound Infra-Structures
– 2. Use of Round-about Methods of Production
– 3. Maximum Utilisation of Natural Resources
– 4. Proper Use of Human Capital Formation
– 5. Improvement in Technology
– 6. High Rate of Economic Growth
– 7. Agricultural and Industrial Development
– 8. Increase in National Income
– 9. Expansion of Economic Activities
– 10. Less Dependence on Foreign Capital
– 11. Increase in Economic Welfare
Rate of Capital Formation

– Rate of capital formation is the ratio between gross capital formation and
gross domestic product at current prices.
– It indicates the proportion of GDP that can be utilized for its own growth.
– It can be measured by dividing gross capital formation by GDP.
Reasons for Slow Growth Rate of Capital
Formation in India

– Low Saving Ability

– Habit of Hoarding
– Inflation
– Inadequate Investment Channels
– Taxation Policy
– Insecurity
– Lack of Allied Facilities and Infrastructure
– Unequal Distribution of Income and Wealth
some suggestions for achieving
this

–  Tax policy
– Encourage Savings
– Facilitate Investment and Production
– Maintenance of Law and Order
– Equal Distribution of Wealth
– Improving and Developing Basic Utilities
– Cheap Capital
– Identification of Investments
– Lack of Capital Formation:
–  Rate of capital formation is low because of lower level of income.

–  Gross domestic capital formation was 23.3% in 1993-94 increased

upto the level os 38.1% in 2007-08 but declined upto 34.8% in 2012-
13.
– Gross Fixed Capital Formation (Constant Prices)
– As per RBI, Gross capital formation refers to the ‘aggregate of gross
additions to fixed assets (that is fixed capital formation) plus change
in stocks during the counting period.’
– Fixed asset refers to the construction, machinery and equipment.
– India Gross Fixed Capital Formation
– 1996 - 2020 | Quarterly | USD mn | CEIC Data
– India’s Gross Fixed Capital Formation was reported at 191.410 USD bn in Mar 2020.
– This records an increase from the previous number of 190.539 USD bn for Dec 2019.
– India’s Gross Fixed Capital Formation data is updated quarterly, averaging 95.769 USD bn from Jun 1996 to Mar 2020, with 96
observations.
– The data reached an all-time high of 207.314 USD bn in Mar 2018 and a record low of 20.971 USD bn in Jun 1996.
– India’s Gross Fixed Capital Formation data remains active status in CEIC and is reported by CEIC Data.
– The data is categorized under World Trend Plus’s Global Economic Monitor – Table: Nominal GDP: Gross Fixed Capital Formation:
USD: Quarterly: Asia. CEIC converts quarterly Gross Fixed Capital Formation into USD.
– Central Statistics Office provides Gross Fixed Capital Formation in local currency based on SNA 2008, at 2011-2012 prices.
– Federal Reserve Board average market exchange rate is used for currency conversions.
– Gross Fixed Capital Formation prior to Q2 2011 is based on a combination of SNA 2008 and SNA 1993, at 2004-2005 prices and prior
to Q2 2004 is based on SNA 1993, at 1999-2000 prices.
  191,4­10.073
Last
Mar 2020

Previous  190,5­38.901
Dec 2019

20,97­1.334
Min Jun 1996

207,3­13.569
Max Mar 2018

Unit USD mn

Frequency Quarterly

Range Jun 1996 - Mar 2020

Updated on 03 Jun 2020
– India Gross Savings Rate
– 1951 - 2019 | Yearly | % | CEIC Data
– India's Gross Savings Rate was measured at 30.1 % in Mar 2019, compared with 32.4 % in the previous
year.
– India Gross Savings Rate is updated yearly, available from Mar 1951 to Mar 2019, with an average rate of
18.6 %.
– The data reached an all-time high of 37.8 % in Mar 2008 and a record low of 7.9 % in Mar 1954.
– CEIC calculates Gross Domestic Savings Rate from annual Gross Domestic Savings and annual Nominal
GDP.
– Central Statistics Office provides Gross Domestic Savings in local currency and Nominal GDP in local
currency based on SNA 2008, at 2011-2012 prices.
– Gross Domestic Savings Rate is annual frequency, ending in March of each year.
– In the latest reports, India's GDP expanded 3.1 % YoY in Mar 2020.
– India's Nominal GDP reached 735.3 USD bn in Mar 2020.
– Its GDP deflator (implicit price deflator) increased 4.3 % in Mar 2020. India's GDP Per Capita reached
2,139.2 USD in Mar 2020.
 Last  30.1
2019

 32.4
Previous 2018

Min 7.9
1954

Max 37.8
2008

Unit %

Frequency Yearly

Range 1951 - 2019

Updated on 03 Jun 2020