Capital Formation

Reviewed by Vineeth | Updated on Aug 27, 2020


Capital formation is referred to as the accumulation of the net capital over an accounting period for a specific nation. The term capital formation also refers to the addition of capital goods like tools, equipment, electricity, and transportation assets. Countries require capital goods to substitute the older ones that are utilised to produce a given product or service. If a nation is unable to substitute capital goods on reaching the end of their lives, then the production is going to go on the southwards direction. Usually, the higher the capital formation in the economy, the faster it grows to generate income.

Understanding Capital Formation

A scenario wherein producing excessive goods and services may result in an increase in the income levels in the country. To amass additional capital, a country has to churn out savings and investments from households and policies of the government. Nations that have a higher rate of household savings have more chances of amassing funds to produce capital goods much faster, and a government running on a surplus may invest the excess in capital goods.


The World Bank is the source of technical and financial assistance to the countries belonging to the developing category. The main intention of the World Bank is to eradicate extreme poverty in the world through its various initiatives and programs supported by it. The World Bank tracks and follows the gross capital formation. The World Bank defines it as the expenses apart from fixed assets, plus the actual change in the inventories. Plant, equipment, buildings and machinery are a few examples of fixed assets. Inventories consist of goods and raw material that are up for sale.