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The transfer of capital from individuals, organizations, or government for business use. For example, a widget company experiences capital formation when people buy widgets. The company can then use the profit to encourage investment or to expand its operations, among other options. Capital formation is crucial to economic growth.
The creation of productive assets that expand an economy's capacity to produce goods and services. Private savings facilitates capital formation by allowing resources to be diverted to corporate investment rather than individual consumption.
- the process of increasing the internally available CAPITAL of a business by retaining earnings to add to RESERVES.
- the process of adding to the net physical CAPITAL STOCK of an economy as a means of increasing the economy's capacity to produce goods and services. INVESTMENT by businesses in new plant and equipment is one important source of capital formation, as is investment by the government in INFRASTRUCTURE (roads, railways, etc.).