Importance of Capital Accumulation

Capital plays a very crucial role in the development process. Therefore capital formation is important in the following ways;

  • capital accumulation enlarges the countries capacity to produce goods and services for its nationals, hence promoting better standards of living.
  • The stock of accumulated capital in the form of machinery and tools improves productivity and efficiency of labour. This leads to an increase in real goods and services.
  • Capital accumulated provides a source of finance for investment
  • Capital accumulation makes it possible and easier to carry out research from which technological progress emerges.
  • Capital accumulation plays a vital role in breaking the "visicous circle" of poverty. It promotes commercial activities and provides incentive for savings.

Capital accumulation can solve the poverty in her home

  • Social capital like transport, communication and health infrastructure is basic foundations for economic activity. This promotes economic and social development.
  • Circulating capital , especially liquid or cash capital works as a payment and incentive for other factors of production to be active in the development process ie it is an entrepreneur's strongest weapon in mobilising land and labour to play their role in production and development.
  • Fixed capital in the form of durable physical assets works as an investor's security for acquiring loans from financial institutions.
  • Accumulated capital can enable effective exploitation of a country's idle resources e.g minerals, soils, forests etc.. to achieve development. LDCs are rich in natural resources but still economically poor because they lack sufficient capital to exploit these resources for their benefit.
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