Explain the three stages process of capital formation. In your own words describe what constraints does the developing country like Pakistan face in each of the stage?
Answers
Answer:
Although saving is essential for capital formation, but in a monetized economy, saving may not directly and automatically result in the production of capital goods. Savings must be invested in order to have capital goods. In a modern economy, where saving and investment are done mainly by two different classes of people, there must be certain means or mechanism whereby the savings of the people are obtained and mobilized in order to give them to the businessmen or entrepreneurs to invest in capital.
(a) Creation of Savings:
An increase in the volume of real savings so that resources, that would have been devoted to the production of consumption goods, should be released for purposes of capital formation.
(b) Mobilization of Savings:
A finance and credit mechanism, so that the available resources are obtained by private investors or government for capital formation
(c) Investment of Savings:
The act of investment itself so that resources are actually used for the production of capital goods.
Explanation:
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