What does the term ‘capital formation’ refer to in macroeconomics?
Show answer & explanation
Correct answer: A
Explanation
The correct answer is Option 1: Growth in production capacity through investment.
Detailed Analysis & SolutionIn macroeconomics, Capital Formation (also known as investment) refers to the process of building up the stock of real capital in an economy. It involves diverting a portion of a nation's current income from consumption to the production of capital goods.
Important Key Facts for Competitive ExamsGFCF (Gross Fixed Capital Formation): This is a specific statistical measure used in national accounts to see how much of the new value added in the economy is invested rather than consumed.
Capital-Output Ratio: This indicates the amount of capital needed to produce one unit of output. A lower ratio means the capital is being used more efficiently.
Human Capital Formation: This refers to the process of acquiring and increasing the number of persons who have the skills, education, and experience essential for economic growth.
Role of Infrastructure: In India, the government's focus on CAPEX (Capital Expenditure) in budgets is aimed directly at boosting capital formation to spur long-term growth.
Potential Competition QuestionsQ1. Which of the following is considered the most essential prerequisite for capital formation?
Answer: Mobilization of savings
Q2. Capital formation leads to which of the following in the long run?
Answer: Shift of the Production Possibility Curve (PPC) outward