Capital formation is a process that is vital to help facilitate economic growth. With an upward trend in economic growth, new jobs can be created, technology, innovation, and etc. With regards to the concept of Capital, it comprises many items, viz: Money, equipment, Real Estate, machinery, etc etc. With regards to this article, the focus of Capital Formation will be simply cash and its equivalents.
How is Capital Formed?
It all starts with human action. Humans seek to improve their circumstances via voluntary exchange. Voluntary exchange takes place, as the actors in the marketplace continue to produce and trade. In this process, humans will seek to place some “capital” aside. They may place it in a mattress, coffee can, a hole in the backyard, a pillow, or with a financial intermediary. Some examples of a financial intermediary are as follows: A bank, credit union, investment brokerage, and insurance company. Once the actors begin the process of production, some of the “savings” goes into the bank. This is the start of the process on how capital is formed.
The Role of the Financial Intermediary
With the process of capital formation, it begins with productivity. The actors involved in the labor market place aside some of their earnings, as they prefer to use that portion for future consumption. In turn, financial intermediaries loan out monies from this capital base to business owners, individuals and the like to help them acquire assets.
Central Bankers Are Wrong About Inflation and Deflation: The majority of economists view deflation as a general decline in prices of goods and services. This is viewed as a major threat to the public’s well-being for deflation is seen as a major factor that plunges the economy into an economic depression.
US Job Growth Rate Hits 28-Month Low: The Bureau of Labor Statistics released new employment data today, and nonfarm payroll employment increased in May be the smallest amount seen in 28 months.