Capital formation and its sources in Pakistan

Capital Formation

Increase in the stock of material and human capital of a country is called capital formation.

Sources of capital formation in Pakistan:

  v Domestic sources.

  v Foreign sources.

 1.     Domestic sources:

       Domestic sources of capital formation in Pakistan are as follows.

a.     Voluntary savings.

b.     Involuntary savings.

c.      Government borrowing.

d.     Use of idle resources.

a)     Voluntary savings:

Voluntary savings is an important source of capital formation. Household and business sectors save a part of their current income which is then used as a source for capita; formation in the country.

b)    Involuntary savings:

Involuntary savings are made in the form of taxes by the government on general public. Government generates resources through taxes which are then used for capital formation.

c)     Government borrowing: 

    Another domestic source of capital formation in Pakistan is government borrowing. The government issues short term and long term bonds to commercial banks and general public and collects resources which are used for capital formation in the country.

d)    Use of idle resource: 

     |Use of idle resource of capital formation. Which the domestic idle resources are properly used rate of capital formation can be increased. For example in villages side employment rate is very high if the government engages unemployed people in the construction of roads, Schools College and dams etc then capital formation can be increased in the economy.

2.     Foreign sources: 

     Foreign source of capital formation includes the following sources of capital formation in Pakistan.

a)     Foreign aid.

b)    Restriction on import of luxury goods.

a)     Foreign aid: 

     

    Foreign aid is an important source of capital formation in Pakistan. Government of Pakistan receives foreign aid from international financial intuition and advanced countries of the world and collects more and more sources for capital formation in the country. 

b)    Restriction on important of luxury goods: 

    Restriction on import of luxury goods save precious foreign exchange earnings and if those foreign exchange earnings are used for the import of capital goods then such steps will promote capital formation in the economy.