Final answer:
Savings in an economy provide the essential funds for capital formation, which encompasses creating capital goods like factories and machines. These investments drive productivity, economic growth, and wealth generation. Ample savings can be transformed into productive investments, enhancing the economy's productive capacity.
Step-by-step explanation:
Capital Formation and Savings
The process of capital formation in an economy is fundamentally linked to the act of saving. When individuals, businesses, and the government in a nation save, they set aside resources that can be used for future investments. These savings provide the necessary funds for the creation of capital goods such as factories, machines, and technology, which are essential for producing goods and services. Increased capital allows for enhanced productivity, economic growth, and the generation of wealth.
Without sufficient savings, there is a limited scope for investments, which hinders the possibility for capital formation. On the other hand, when there are ample savings in an economy, there is a greater potential for these savings to be transformed into productive investments, leading to an increase in the productive capacity of the economy and contributing to its overall development.