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;
- 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.
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.
- Investments by businesses in new plants
and equipment.
- 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.
