Significances of capital formation in an economy are :
(1) Increase in output and productivity : Increases in the capital stock leads to increase in output and productivity. Level of output increases because of increase in factor inputs in the form of capital. Increased use of capital increases productivity of factors of production because capital is more productive than other factor inputs.
(2) Large scale Production: Capital accumulation leads to large scale production, increased specialisation and division of labour. By adding to the stock of capital, the economy can enjoy the advantages of largescale production, increased specialisation and division of labour. Therefore, the productivity in the economy will increases.
(3) Creation of Infrastructure : Capital formation provides the required capital for development of infrastructure. Capital is required to build power stations, schools, hospitals, irrigation network etc. Therefore, capital formation promotes the develop-ment of economic and social infras-tructure in a country.