Capital Accumulation - Explained
What is Capital Accumulation?
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Table of ContentsWhat is Capital Accumulation?How does Capital Accumulation Work? Corporate Capital AccumulationInvestment Capital AccumulationAcademic Research on Capital Accumulation
What is Capital Accumulation?
Capital accumulation refers to a rise in the value of an asset as a result of investment or profits generated. The sole aim of capital accumulation is to create profit or revenue for a company. Therefore, when a business acquires assets that will generate value or make investments that generate profit, it is capital accumulation. There are a number of ways that business and individuals accumulate capital, for instance, a business can generate value from an asset through rent, capital gains and interests. Making investments is another way to achieve capital accumulation.
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How does Capital Accumulation Work?
Generally, assets, whether tangible or intangible generate profit for a company. Investment also attract rate of returns that in turn increase the capital held by a company. Through capital investment, individuals and companies can accumulate capital. For instance, an individual who invests in a company do so for the exchange of profit. A company can invest in stocks, bonds or acquire another company to accumulate capital. Return on Investment (ROI) is another avenue companies and individuals generate wealth. Investment assets which entails increasing the holding of valuable assets by a company is another way of accumulating capital. Other ways of accumulating capital is through investment savings and purchase.
Corporate Capital Accumulation
How healthy a company is financially is known through its financial statement. Primarily, most companies generate capital from sales of products and rendering of services. However, this is not enough to achieve capital accumulation, companies who seek to accumulate wealth devise other means such as investment savings and purchases, investment assets and others. The capital accumulation of a company can be known through its cash flow statements of financial statements. Profits that significant generate capital accumulation for a company are also detected through the income statement.
Investment Capital Accumulation
Another major way companies accumulate capital is by investing in bonds, stocks, assets and other securities. The gains or returns realized from these investments contribute to the company's capital accumulation. Investment capital accumulation refers to capital generated from interest on savings, return on investments, and capital gains. Companies who invest a lot have more advantage when it comes to higher capital accumulation. Not only do companies seek to have greater capital accumulation, individual investors are also keen of generating more wealth. Oftentimes, investors create diversified portfolios for the purpose of capital accumulation. Investors use brokerage accounts, 401k plans and other diversified accounts for capital accumulation, another set of people that seek capital accumulation are institutional investors, they achieve this by increasing their investment holdings and maximising greater profits.
Academic Research on Capital Accumulation
- Capital accumulationand economic growth, Kaldor, N. (1961). Capital accumulation and economic growth. InThe theory of capital (pp. 177-222). Palgrave Macmillan, London. A Theoreticalmodel consists of certain hypotheses concerning the causal inter-relationship between various magnitudes or forces and the sequence in which they react on each other. We all agree that the basic requirement of any model is that it should be capable of explaining the characteristic features of the economic process as we find them in reality. It is no good starting off a model with the kind of abstraction which initially excludes the influence of forces which are mainly responsible for the behaviour of the economic variables under investigation; and upon finding that the theory leads to results contrary to what we observe in reality, attributing this contrary movement to the compensating (or more than compensating) influence of residual factors that have been assumed away in the model. In dealing with capital accumulation and economic growth, we are only too apt to begin by assuming a given state of knowledge (that is to say, absence of technical progress) and the absence of uncertainty, and content ourselves with saying that these two factors technical progress and uncertainty must have been responsible for the difference between theoretical expectation and the recorded facts of experience. The interpretative value of this kind of theory must of necessity be extremely small.
- The role of intergenerational transfers in aggregatecapital accumulation Kotlikoff, L. J., & Summers, L. H. (1981). The role of intergenerational transfers in aggregate capital accumulation.Journal of political economy,89(4), 706-732. This paper uses historical U.S. data to directly estimate the contribution of intergenerational transfers to aggregate capital accumulation. The evidence presented indicates that intergenerational transfers account for the vast majority of aggregate U.S. capital formation; only a negligible fraction of actual capital accumulation can be traced to life-cycle or "hump" savings. A major difference between this study and previous investigations of this issue is the use of more accurate longitudinal age-earnings and age-consumption profiles. These profiles are simply too flat to generate substantial life-cycle savings. This paper suggests the importance of and need for substantially greater research and data collection on intergenerational transfers. Life-cycle models of savings that emphasize savings for retirement as the dominant form of capital accumulation should give way to models that illuminate the determinants of intergenerational transfers.
- From physical to humancapital accumulation: Inequality and the process of development Galor, O., & Moav, O. (2004). From physical to human capital accumulation: Inequality and the process of development.The Review of Economic Studies,71(4), 1001-1026. This paper develops a growth theory that captures the replacement of physical capital accumulation by human capital accumulation as a prime engine of growth along the process of development. It argues that the positive impact of inequality on the growth process was reversed in this process. In early stages of the Industrial Revolution, when physical capital accumulation was the prime source of growth, inequality stimulated development by channelling resources towards individuals with a higher propensity to save. As human capital emerged as a growth engine, equality alleviated adverse effects of credit constraints on human capital accumulation, stimulating the growth process.
- The relationships between supplier development, commitment, social capital accumulation and performance improvement Krause, D. R., Handfield, R. B., & Tyler, B. B. (2007). The relationships between supplier development, commitment, social capital accumulation and performance improvement.Journal of operations management,25(2), 528-545. This study investigates the relationships between U.S. buying firms supplier development efforts, commitment, social capital accumulation with key suppliers, and buying firm performance. We identify linkages between supply chain management research on supplier development and organization theory research on social capital to consider how buying firm commitment to a long-term relationship, cognitive capital (goals and values), structural capital (information sharing, supplier evaluation, supplier development), and relational capital (length of relationship, buyer dependency, supplier dependency) are related to buying firm performance improvements (cost improvements, and quality, delivery, flexibility improvements). Analysis of buying firms from the U.S. automotive and electronics industries provides support for the theory that buyer commitment and social capital accumulation with key suppliers can improve buying company performance. Moreover, the findings suggest that the relationships of structural and relational capital vary depending on the type of performance improvement considered.
- The stock market and capital accumulation Hall, R. E. (2001). The stock market and capital accumulation.American Economic Review,91(5), 1185-1202. The value of a firm's securities measures the value of the firm's productive assets. If the assets include only capital goods and not a permanent monopoly franchise, the value of the securities measures the value of the capital. Finally, if the price of the capital can be measured or inferred, the quantity of capital is the value divided by the price. A standard model of adjustment costs enables the inference of the price of installed capital. Data from U.S. corporations over the past 50 years imply that corporations have formed large amounts of intangible capital, especially in the past decade.