There are several types of capital in economics and business. Some contribute directly and are used to produce goods and services. Meanwhile, others contribute indirectly. And, here, we discuss four of them:
Physical capital or capital goods are man-made tools – such as machines and equipment – that are used to produce goods and services. That is what “capital” means in the economist’s definition when describing factors of production or economic resources. It is one of four economic resources besides land, labor and entrepreneurship.
Physical capital is vital because it provides economic benefits to businesses. It contributes directly, which companies use to assist and support the production of goods or the provision of services. For example, manufacturing companies use machines to process raw materials into intermediate or final goods.
If the accumulated physical capital increases, we expect the firm to produce more output. Improved quality also contributes to increased output, for example by adopting more sophisticated technology. So companies can increase production by investing in more capital or better quality technology.
Furthermore, the company reports fixed capital as fixed assets. In financial statements, you may know it as property, plant and equipment (PP&E). Businesses often spend a lot …