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Thursday, 16 August 2018

Reasons for low rate of capital formation

Capital formation is essential for the growth of an economy. If there is more capital formation, Investment in the economy will increase that fosters the growth of an economy but rate of capital formation differs in economies. There are certainly few reasons determine low rate of capital formation
Reasons for low rate of capital formation
Reasons for Low rate of Capital formation

. In under-developed economies low rate of capital formation is principle character due to the following reasons:-

1. Low savings

There is very low savings in under-developed economies due to low per capita income that results is low saving. Low saving - Low production- low income. Economy is caught in Vicious Cycle of poverty. There may be other reasons for low savings of people.

2. Lack of Risk takers ( Entrepreneurs)

There are scarcity of skilled and risk takers business Men who can bring innovations in under-developed economies.

3. Lack of Motivation to invest 

As said above , vicious cycle of poverty does not motivate producers to invest more because of low level of demand. Due to low level of income , level of demand remains low. 

So once the vicious cycle is broken , economy starts to develop and come out from the trap of low rate of capital formation.

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