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 Economic Growth implies a long term rise in per

capita national output.

 Increase in output in developed countries has been

associated with radical changes in production
techniques and organisations, in the institutional
setup and in the socio cultural and psychological
environment and attitudes of the people.

 During the growth process there has invariably been

a shift of population from agricultural and other
primary producing sectors to the industrial sector and
an increase in capital labour ratio and a more than
proportionate increase in labour output ratio.

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 Capital formation implies the diversion of the

productive capacity of the economy to the
making of capital goods which increases future
productive capacity.

 Process of capital formation involves three

distinct but independent activities:
 Savings
 Finance
 Investment

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 Savings: Refers to the activity by which claims to

resources, which might be put to current consumption,
are set aside and so become available for other
purposes. It represents the excess o income over
current consumption.

 Investment: Is the end activity that adds to the volume

of productive capital

 Finance: Is a link between savings and investment. It

provides a mechanism through which savings are
pooled together and put into the hands of those able
and willing to invest.

SVINGS FINANCE INVESTMENT

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 Low level of income

 Low Productivity
 Uneven Distribution
 Conspicuous consumption
 Marginal Propensity to consume is very high
 Small size of domestic market
 Lack of entrepreneurial ability and rigidity
 Size of Entrepreneurial class is small
 Market imperfections
 Ignorance and backwardness of society
 Inadequate no. of financial institutions.