What is Capital Formation?
“The transfer of savings from households and governments to the business sector, resulting in increased output and economic expansion.” Some argue that this popular macro-economic definition is wrong on two counts. Firstly, many larger corporations engage in corporate self-financing. Secondly, the transfer of funds to corporations may not result in increased output or economic expansion at all. But for our purposes, this definition is appropriate. What type of capital is right for me? It depends on many factors – from the stage of your business, to how much it will cost to get the capital. Basically, capital is available in two forms: debt and equity. Each source carries advantages and disadvantages. Debt is money you raise from a lender. The lender most likely takes a security interest in key assets of your company. The lender fully expects you to repay the principal with interest over a certain time period. The lender is repaid by your company, which reduces the operating cash flow o
A term that is commonly employed in the study of macroeconomics, capital formation has to do with additions to the capital stock in a given accounting period. Pioneered by Simon Kuznets during the 1930’s and 1940’s, capital formation, the approach is heralded by some financial analysts as an essential approach to assessing the true financial picture of a country. Understanding the current rate of capital formation is essential to understanding the status of a national economy, since the figure helps to identify the rate of economic expansion, and the incidence of increased output by the country in question. In many instances, capital formation is considered to be equal to the sum of several factors. Capital formation has to do with the fixed capital investment within a country, as well as the increase in the value of the various inventories of assets held, and the net value of assets that have been loaned to other countries during the period under consideration. This can include the tr
Capital Formation : Capital formation is a term used in national accounts statistics and macroeconomics. It basically refers to the net additions to the (physical) capital stock in an accounting period, or, to the value of the increase of the capital stock; though it may occasionally also refer to the total stock of capital formed. Thus, in United Nations System of National Accounts, capital formation equals fixed capital investment, the increase in the value of inventories held, plus (net) lending to foreign countries, during an accounting period. Capital is said to be “formed” when savings are used for investment purposes, often investment in production. In the USA, statistical estimates for capital formation were pioneered by Simon Kuznets in the 1930s and 1940s. For more details see the link… http://en.wikipedia.org/wiki/Capital_for…
