Capital formation is a key determinant of economic development according to the document. Higher capital formation leads to greater productive capacity and higher national income. Capital formation depends on income, savings, and investment. Natural resources also play an important role if they are utilized fully. Other factors discussed include marketable agricultural surplus, conditions of foreign trade, economic systems, human capital formation, technical know-how, education, infrastructure, political stability, and reduction of corruption.

1. Prof. Mahendra Kumar Ghadoliya
www.ghadoliyaseconomics-mahendra.blogspot.in
Determinants of Economic Development

2. 1. CAPITAL FORMATION
Growth rate of national income is determined, to the large extent , by
the rate of capital formation. The higher the rate of capital formation,
the greater is the addition to productive capacity of a nation, i.e., a
greater flow of goods & services and higher national income.
Capital Formation depends on income, desire to save and Investment
Investment increases income more due to multiplier
To make use of the natural wealth, a necessary amount of capital is
needed so that they can be used to their fullest.
If the level of income is low the savings will also be low. In such a case a
country may use foreign capital.
The actual requirement of capital depends upon growth target and
capital output ratio.

3. Capital Formation & Labour efficiency:
Increase in stock of capital enables labour to work with greater efficiency,
because efficiency to the large extent depends on the nature and type of
the equipment they are working with.
SUPPLY AND DEMAND FOR GOODS & SERVICES:
Capital formation increases productive capacity and expands volume
of goods and services produced, and on the other hand it increases the
rate of investment, which in turn creates income for the workers and
increased income creates additional demand for goods produced.

4. 2. NATURAL RESOURCES
Availability of natural resources in abundance is an important factor in a
country’s economic development. Some developed countries like the
USA, Canada, Australia, New Zealand, etc. have abundance of natural
resources.
However, it does not mean that all these countries that have natural
resources in abundance, are among the advanced nations.
Countries which intend to initiate the process of economic growth must
direct their efforts to make fuller use of their existing resources and
exploration of new resources.
Renewable and non-renewable Resources
Natural Resources Increase income
Natural Resources Supply & Demand affect development Per Capita
Employment, Income & Efficiency.

5. 3. Marketable Surplus of Agriculture:
The term ‘marketable surplus’ refers to the excess of output in the
agricultural sector over and above what is required to allow the
rural population to subsist.
Food for urban population depends on it
In case marketable Surplus is not sufficient a country has to import
food grains to feed its population. It give rise to Balance of payment
crisis.
India has become a self sufficient country after the success in green
revolution. Now we have sufficient marketable surplus and
sometimes export our surplus production.

6. 4. Conditions in Foreign Trade:
Trade is considered beneficial for both the countries as suggested by
the theory of comparative advantages.
Less developed countries should specialize in production of primary
products as they have comparative cost advantage in their
production.
The developed countries, on the contrary, have a comparative cost
advantage in manufactures including machines and equipment and
should accordingly specialize in them.
Developing countries should not totally rely on the import
substitution policy but should also develop it manufacturing sector

7. Economic System:
The economic system and the historical setting of a country also decide
the development prospects to a great extent.
The policy of leissez faire (i.e. leave free) was favoured by the earlier
classical economists.
Capitalist system
Centrally planned economic system
Mixed system with efficient market and rational interventionist role of
the State
Restrictive or import substitution policy
Liberalization policy

8. Non-economic Factors in Economic Development:
1. Human Resources -
Growth of population is not always a curse for the society but
sometimes it can be a boon as well, increasing population provides
opportunity for expanding market base in the terms of demand and
supply of goods and services, and more work force for producing
such output.
Demand for goods
Working age population
Education and skilled manpower
Health and Nutrition
Demographic Dividend of Human Capital.

9. 1. Human Capital- Contd.
HRD or Human Capital formation means creation of capabilities and
capacities in people to work efficiently and competently in various
economic activities.
Investment on human beings in the form of education, training and health
facilities that contribute to increased productivity is called ‘human capital
formation’.
In developed nations the health and education levels are much higher, and
with better health and education, these countries produced larger output
and higher incomes.
The role of human capital formation in economic development can be
stated in the terms of increase in output, in productive capacity, improved
quality of life and increase in inventions and innovations.

10. 2. Technical Know-how:
As the scientific and technological knowledge advances, man discovers
more and more sophisticated techniques of production which steadily
raise the productivity levels.
Labour intensive vs Capital incentive
Output= f (LKT)
It means development and application of new techniques of production.
To incorporate new technology in the production process or in order to
modify the existing plants, a larger investment to procure or produce
new equipment is required, hence a higher rate of capital formation is
necessary to support technological progress.
Since technology has now become highly sophisticated, still greater
attention has to be given to Research and Development for further
advancement.

11. Education Improves levels of health – improving education
(particularly literacy) improves the health of society.
Vaccines.
HIV,
Sanitary habits,
Water filtering
Balanced Diet
Education
Higher expenditure is required
Disparities between urban and rural area
 Child labour
Social Taboos
Dropout ratio is very high

12. Institutional factors affecting development
There are a number of non-economic factors that act as sources of economic
development and barriers to development
What do we mean the institutional framework?
Organisations, structures, rules
The main institutional factors are
Education
Healthcare
Infrastructure
Political Stability and corruption
Legal system
Financial system, credit and micro finance
Taxation
The use of appropriate technology
The empowerment of women
Income distribution

13. Availability of Infrastructure
 Rail-road network
 Public transport
 Metro
 Airports,
 Seaports
 Gas
 Electricity

14. Political stability
 Political instability can lead to civil war and complete economic
breakdown
 Political stability leads to growth
 When there is a political freedom citizen are more likely to have a
say in the development process.
 Countrioes that have political stability attract more FDI and foreign
aid which helps in improving technology and innovations.

15. Corruption
 Bribes increase the costs of business leading to higher prices
 Officials divert funds to projects that are not in the public
interest
 Dishonest exploitation of power for personal gain
 Freedom of speech is lacking
 Corruption leads to an unfair allocation of resources –
contracts don’t go to most efficient bidder. Governments are not
accountable to the people
 Constant paying of small bribes reduces economic well being
of ordinary citizens
 Legal structure is weak
 Corruption leads to reduction in effectiveness of legal system