Capital
In economics, capital (also referred to as capital goods, real capital, or capital assets) references non-financial assets used in the production of goods and services. Capital is important because it is a significant factor in the creation of wealth.
Capital goods are used in the production process and may depreciated through accounting practice to incorporate utilization, though they are not consumed. It is possible for capital goods to be maintained or regenerated depending on the type of capital.
Classifications of Capital
In a broad sense, capital can be divided into two categories:
- Physical Capital: capital that must be produced by human labor before it can become a factor of production (also referred to as manufactured capital). Examples include machinery and buildings .
- Natural Capital: a factor of production that occurs naturally in the environment; for example, land or minerals.
Fundamentally, capital is any product that is produced and has the ability to enhance a person's power to perform work that is economically useful. For example, roads are capital for individuals who live in a city.
Capital is directly impacted by both interest and profit. Interest is a fee that is paid by a borrower of assets. It is a form of compensation for the use of the assets. Commonly, it is the price that is paid for the use of borrowed money. Profit is the accumulation of capital, which is the driving force behind economic activity. Interest allows capital to be obtained, while profit is the accumulation of the capital.
Features of Capital
There are certain features that determine whether a good is considered capital. These features include:
- the good can be used in the production of other goods (this makes it a factor of production),
- the good is not used up immediately in the process of production, unlike intermediate goods or raw materials, and
- the good was produced.
Modern Types of Capital
There are detailed classifications of capital which include the following types:
- Financial Capital is capital that is liquidated as money for trade, and owned by legal entities. It is a form of capital assets that is traded in financial markets. The value of financial capital is based on the market perception of expected revenues and risk.
- Natural Capital is capital that occurs naturally in the environment and is protected because it supports human life. Examples of natural capital include land and water .
- Social Capital is capital that is captured as goodwill or brand value. It is the general concept of inter-relationships between humans have money-like value that motivates actions.
- Instructional Capital is capital that is defines as the aspect of teaching knowledge and transferring knowledge that is not inherent in individual or social relationships.
- Human Capital is capital that includes social, instructional, and individual human talent combined together. As a term, it is used to define balanced growth where the goal is to improve human capital and economic capital equally.