Explain A Source Of Capital Formation (Domestic Source).

Domestic Sources:

1. Individual savings: It is that part of income of individual which is not consumed on consumers good. The saving is a directly proportional function of income .i.e. S = f(Y). The level of savings in a country depends upon the power to save and the will to save. The higher the level of income, the greater will be the amount of savings.

2. Business savings: Business enterprises save when they do not distribute whole of their profits but retain a part of them in the form of undistributed profits which are used for investment in real capital.

3. Government savings: The government savings constitute the money collected as taxes and the profits of public sector. The greater the amount of taxes collected and profits made, the greater will be the government savings. These can be used by the government for holding up new capital goods like factories, machines, roads etc or it can lend them to private enterprise to invest in capital goods.

4. Public Borrowing: It is an important source of capital formation. It acts as an anti-inflationary measure by mobilizing surplus resources to productive channel.

5. Deficit Financing: It is newly created money and is an important source of capital formation in a developing country. It is the method on which the government can fall back to obtain funds but it may lead to inflationary pressures in the economy.

6. Disguised unemployment: The surplus agricultural workers can be transferred from the agricultural sector to the non-agricultural sectors with out diminishing agricultural output. These un-productive workers can be employed in various capital creating projects such as roads, buildings, canals, health centers etc.