| Definition |
The process of increasing the stock of physical and human capital in an economy. |
The act of using resources to create future returns, either through production or financial assets. |
| Scope |
Broader; includes all activities that add to the capital stock of a country. |
Narrower; refers specifically to spending on assets to generate returns. |
| Purpose |
To build long-term productive capacity of the economy. |
To earn income, returns, or profits over time. |
| Types |
Physical capital formation (machinery, infrastructure) and human capital formation (education, health). |
Fixed investment (factories, tools), financial investment (stocks, bonds), and inventory investment. |
| Nature |
Macro-economic concept, focused on economic development. |
Micro-economic or financial concept, focused on individual or firm-level activity. |
| Time Frame |
Long-term contribution to economic capacity and productivity. |
Can be short-term or long-term depending on the asset. |
| Result |
Leads to economic growth and increased production potential. |
Leads to returns in the form of profit, interest, rent, or dividends. |
| Examples |
Building roads, investing in education, constructing factories. |
Buying shares, purchasing real estate, starting a business. |
| Participants |
Mainly involves the government, corporations, and public savings. |
Individuals, firms, institutions, and government. |
| Measurement |
Measured by Gross Capital Formation in national accounts. |
Measured by expenditure on assets or financial instruments. |
| Dependency |
Relies on savings, public policy, and institutional framework. |
Depends on investor confidence, interest rates, and expected returns. |
| Risk |
Generally focused on building capacity; less speculative. |
Often involves market or financial risks. |
| Relation |
Investment is a component of capital formation. |
Contributes to capital formation when used to build productive assets. |
| Impact |
Directly contributes to national income and infrastructure. |
Affects income of investors and can indirectly impact national growth. |
| Government Role |
Key role through policies, spending, and infrastructure development. |
May influence through regulations, incentives, or interest rates. |
Capital Formation vs Investment