More serious obstacles to economic development of under developed countries lie in the operation of vicious circle of poverty, which tends to keep the country in a state of perpetual poverty and economic backwardness. It implies a circular flow of forces tending to act and react upon one another in such a way as to keep a poor country in a state of poverty. In a poor country, the level of income is very, which means a low purchasing power. Since the purchasing power of the people is low and the scope of investment is practically limited. As a result, the productivity is low and the incomes are small. The under developed countries face the vicious circle of poverty on the demand side of capital formation because the low level of real income is low in these countries and the level of demand is low.
Therefore, there is not much inducement for business to make investments, which further reflect on low capital formation. Hence, investment is discouraged and productivity per worker is low. The productivity per worker being low leads to low per capita income and there is poverty. In this way the vicious circle of poverty is completed on the demand side.
Poverty in under developed countries means that the per capita income is low and capacity to save is limited. The rate of savings being low, the rate of investment in turn is bound to be low and the rate of capital formation is low. The level of productivity per worker is extremely low due to great shortage of capital in under developed countries. As a result of the above process, the real income per capita is low and there is poverty.
Therefore, there is not much inducement for business to make investments, which further reflect on low capital formation. Hence, investment is discouraged and productivity per worker is low. The productivity per worker being low leads to low per capita income and there is poverty. In this way the vicious circle of poverty is completed on the demand side.
Poverty in under developed countries means that the per capita income is low and capacity to save is limited. The rate of savings being low, the rate of investment in turn is bound to be low and the rate of capital formation is low. The level of productivity per worker is extremely low due to great shortage of capital in under developed countries. As a result of the above process, the real income per capita is low and there is poverty.