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Characteristics And Meaning Of Capital Formation

Capital and Capital Formation

Meaning of Capital

            Capital is that part of wealth which can be utilised for supplementary production of wealth. As per Marshall, “Capital consists of all kinds of wealth, other than free gifts of nature, which yield income.” Therefore every type of wealth other than which assists in additional production of income is called capital. In this way, money, machine, factories etc. are incorporated in capital endowed, if they are utilised in production. The house in which a man resides is his wealth and the house which is given on rent is his capital. Let us see various types of factors which are different from the terminology ‘capital’.

  1. Capital and Money – All money is not capital. Money consists of currency notes and coins which are escalated or minted by the government. But capital comprises of all those wealth such as machines, tools, and buildings etc. which are termed as capital commodities. Hence, all money is not said to be capital and only those part which is engrossed in production of more income is called capital.
  1. Capital and Wealth – There is dissimilarity amidst capital and wealth. Only that part of wealth which is used for auxiliary production is called capital. Hence all capital is wealth but all wealth is not capital. Furniture used in the home is wealth but if these are leased then it becomes capital.
  1. Capital and Land – Similar to land, capital is also a vital aspect in production but there is diversity amidst capital and land. Capital is produced by human being. He makes it with certain hard work. But the provision of land is a no cost complementary by nature. Man cannot create land. By way of production, supply of capital can be amplified but unquestionably not the land. Land is immovable, while capital is mobile for the reason that its supply can be changed at ease.
  1. Capital and income – There is substantial difference amidst capital and income. Capital is that portion of wealth which is utilised for additional production of income. Thus income is the result of the use of capital. So capital is a stock, whereas the income is a flow produced from capital.
  1. Real Capital and Financial Capital – Real or state-run capital is the stock of producers’ commodities such as machines, raw materials, factories, railways buses, ships, houses etc. which are used for the manufacture of goods and services. It refers to man made and reproducible resources which help in generating output and income.

Financial capital consist of all revenue earning financial assets such as holdings of money stocks, bonds, deeds or mortgages etc. These are substance of personal wealth. They are alleging on other individuals. The same is the case with bank deposits. The dollars we expend or hold in our accounts are part of our personal wealth. They are claim on goods and services, as in the case of stocks and bonds. Money holdings are financial capital and not real capital. Since financial capital is the claim on assets, it does not engender output and income.

Characteristics of Capital

            Capital has its own peculiarities which distinguish it from other factors of production. It possess following features.

  1. Man produces Capital – Capital is that wealth which is used in the manufacture of commodities. It is the outcome of human efforts. Thus every type of capital such as roads, machines buildings, factories etc, are produced by human. It is a produced factor of production.
  1. Capital is a passive factor of production – Capital cannot produce without the help of the active services of labour. To produce with machines, labour is required. Thus labour is an active whereas capital is a passive factor of production. Capital on its own cannot produce anything until labour works on it.
  1. Capital is a produced means of production – The composition or supply of capital is not automatic but it is produced with the joint efforts of labour and land. Therefore capital is a produced means of production.
  1. Capital is variable – The total supply of land cannot be changed whereas the supply of capital can be increased or decreased. If the residents of a country produce more or save more from their income and these savings are invested in factories or capital goods it increases the supply of capital.
  1. Capital is itinerant than other factors of production – Of all other factors of production, capital is more mobile. Land is perfectly immobile. Labour and entrepreneur also lack mobility. Capital can be easily transported from one place to another.
  1. Capital Depreciates – As we go on using capital, the value of capital goes on depreciating. When machines are used continuously for sometime, these depreciate and their value falls.
  1. Capital is stored up labour – Scholars like Marx confess that capital is stored up labour. By putting in his labour man earns wealth. A part of his wealth is spent on consumption goods and the rest of it is saved. When savings is invested it becomes capital. In other words, capital is the effect of accretion of savings of a man. Hence, capital is stored up labour.

Meaning of Capital Formation

            Capital formation or accretion plays a principal role in all types of economics whether they are of the American or the British type, or the Chinese type. Progress is not feasible without capital formation. Capital formation refers to all the produced way of additional production such as roads, railways, bridges, canals, dams, factories, seeds, fertilisers etc. According to Prof. Nurske, “The meaning of Capital formation is that society does not apply the whole of its current productive activity to the needs and desires of immediate consumption, but directs a part of it to the tools and making of capital goods: tools and instruments, machines and transport facilities, plant and equipment – all the various forms of real capital that can so greatly increase of productive effort…The essence of the process the, is the diversion of a part of society’s current available resources to the purpose of increasing the stock of capital goods so as to make possible an expansion of consumable output in the future.”

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