Detailed Study of Capital

Sunday, February 03, 2013


Capital
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;
  1. Fixed Capital
  2. 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.
In short;
  • 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
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.
  1. Investments by businesses in new plants and equipment.
  2. Investments by the government in infrastructure.

Investment
Investment refers to the production of real capital goods.

Gross Investments
Gross Investment is the total output of capital goods during a given period of time.

Depreciation
Depreciation describes the extent to which a stock of capital losses its value owing to wear and tear and obsolescence.

Net Investment
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.
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