Capital refers to all man made resources, which are used to produce goods and services. Eg; Plant, Machinery and Equipment.
Features of Capital
- Capital is a man made resource
- Capital is geographically mobile
- Capital is occupationally mobile
- Supply of capital can be altered
Types of Capital
There are two types of capital. They are;
- Fixed Capital
- Working Capital
1. Fixed Capital
Fixed Capital refers to all durable goods which are used in the production process for a long time. It does not change its form in the production process. Eg; Machinery, Tools, Factory etc.
- Fixed capital is durable
- Fixed Capital is not altered
2. Working Capital
Working capital refers to those which are used up in the production process. They are altered into some other forms. Eg; Seeds, Timbers etc.
Capital Formation refers to the process of increasing internally available capital of a firm by retaining earnings to add to reserve. The formation/production/accumulation of Capital helps to increase productivity in the future (Eg; Automation). But, there is an opportunity cost. A rise in the production of capital goods leads to a fall in the production of consumer goods.
The following are the Sources of Capital Accumulation.
- Investments by businesses in new plants and equipment.
- Investments by the government in infrastructure.
Investment refers to the production of real capital goods.
Gross Investment is the total output of capital goods during a given period of time.
Depreciation describes the extent to which a stock of capital losses its value owing to wear and tear and obsolescence.
Net investment is the increase in the total stock of capital.
Net Investment = Gross Investment – Depreciation
The rate of net investment is given importance as it indicates the rate at which a country’s stock of capital increases.