Economics(Paper-4) - Shivaji University

other sectors backward in developing countries, which tends to low national income
and so as the saving and capital formation.
2) Low productivity : The low productivity makes low level of national income,
savings and finally low capital formation. It is the capital formation which may enhance
the level of productivity in agriculture as well as industry.
3) Demographic facts : In under developed country growth rate of population is
very high compare to rate of capital formation. Such countries people’s life expectancy,
becomes less. And at last demographic facts get affected.
4) Entrepreneurial ability : The entrepreneurial ability lacks in case of developing
countries as a result of this low capital formation takes place in such countries.
Entrepreneur faces many problems such as small size of market, deficiency of capital
lack of private property and contract etc. All these retard the economic development
and capital formation become less.
5) Lack of Economic overhead : Now a days economic overhead are called as
infrastructural facilities i.e. power, transport banking etc. These lacks in developing
countries. As a result of this capital formation becomes less available.
6) Size of Market : The small size of the market is another reason for the low rate
of capital formation in LDCs. It is a big hurdle in the growth of entrepreneurship. The
purchasing power is always less in such countries as a result capital formation becomes
less.
7) Tax policy : Taxes also retard economic development and also capital formation
if they are beyond certain limits. These and suma fact happens in case developing
countries and the result is less capital formation.
8) Technology : Obsolete (out of date) technology is also an important factor
forces for low growth of capital formation in less developed economics Technological
backwardness impacts badly on productivity and output and income etc. The net result
is less capital formation in such countries.
9) Weak financial Institutions : Aother important factor stands in the way of capital
formations is lack of efficient financial institutions to supply the desirable funds. Generally
heavy doses of funds are required for the productive forces. But due to inefficient financial
institutions, such climate of finance does not available and this makes less capital
formation.
10) Deficit financing : Deficit finance is panecia for economic development for a
country. If it never crosses the safety limits. But if it crosses the safety limits then tends
to lower the rate of capital formation.
B Sources of Capital formation :
Capital formation depends basically on savings financial institutions and government
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