What is capital in economics?

3 min read

In economics, capital is one of the four factors of production, along with land, labor, and technology. All of them are resources used to produce goods and services to satisfy human needs.

Capital is made up of durable goods (such as tools, machinery or factories) used for the manufacture of other goods or services. The financial resources invested in a company to produce other goods, as well as the profits obtained, are also capital .

types of capital

Capital can be classified in several ways.

According to the owner:

  • Public capital: when it is owned by the State.
  • Private capital: when the owners are private agents (individuals or legal entities).

According to the constitution:

  • Physical or tangible capital: are those visible assets, such as machinery, computers, buildings, etc.
  • Intangible capital: they are not visible but they are real, such as trademarks, patents, goodwill, etc.

According to the term:

  • Short-term capital: when it is expected to obtain benefits for it in a period of less than one year. In the accounting of a company it is considered a current asset.
  • Long-term capital: the one that is invested with the prospect of obtaining long-term benefits. At an accounting level, it is included as a non-current asset.

 According to its use or function:

  • Social capital: the contributions that each of the partners make to a company.
  • Venture capital: is the investment in the capital of private companies (not listed).
  • Free float: The percentage of a company's shares that are outstanding and can be purchased by retail investors (such as publicly traded shares).

One can also speak of human capital, which is the value of the income-earning potential that people possess. This value depends on the set of knowledge, abilities, skills and talents that each person possesses.

What are the differences between financial capital and physical capital?

The term physical capital refers to the stock of produced goods that contributes to the production of other goods and services, while financial capital refers to all monetary resources that have not been consumed by their owner, but have been transferred to a financial market in order to obtain an income for them.

Physical capital is something tangible (such as machines, factories, office buildings, furniture, etc.) while financial capital is usually not (it includes money -which can be physical- but also other instruments that can be converted into money such as stocks, bonds, etc.)

How important is capital in the world economy?

Capital is an instrument to generate wealth. This is how the capitalist system understands it. Combined with the other productive factors, it is used to manufacture goods or services, and it can also be invested directly in the markets with the aim of obtaining profits or interest.

Through investment (the accumulation of capital, both physical and financial) production processes are improved and human work is made more efficient, which facilitates the economic growth of societies.

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