Meaning of Capital
When we talk about capital, we are referring to the money, goods, or assets that a company or an individual possesses. It is a fundamental element for economic development, as it is necessary to carry out any productive activity, invest in innovation, or start a business. However, capital is much more than a simple financial resource.
Capital is a fundamental factor of production that plays a vital role in the economic development of any society. In addition to being a financial resource, it has several unique features that make it an essential tool for businesses to grow and prosper. In this article, we will delve into the concept of capital, its different types, and its features.
Types of Capital
Before we dive into the features of capital, it’s important to understand the different types of capital that exist. There are two main types of capital: financial and non-financial.
A. Financial Capital: This type of capital refers to the money and other financial assets owned by a company or an individual. It includes cash, savings, investments, stocks, and bonds. Financial capital is essential for companies to invest in new projects, research, and development or to pay off debts.
B. Non-Financial Capital: This type of capital refers to the assets that are not directly related to money but that contribute to the value of a company or an individual. Non-financial capital can include things like equipment, buildings, land, intellectual property, and human resources. These assets can help a company improve its production, increase its efficiency, or develop new products.
Features/ Characteristics of Capital
The followings are the features or characteristics of capital:
- Capital is man-made: Unlike land, capital is a man-made resource that is created by humans. It is the result of human effort and innovation and is used to produce goods and services.
- Capital is durable: Capital goods are designed to last for a long time and can be used repeatedly in the production process. They are not consumed immediately, like raw materials or labour, and they can be used repeatedly in the production process.
- Capital is diverse: Capital goods are of various types, ranging from machinery and equipment to infrastructure and buildings. Each type of capital has its specific use in the production process.
- Capital is costly: The production of capital goods requires a significant amount of investment. Capital goods are generally expensive to purchase and maintain, making them a considerable investment for businesses.
- Capital is subject to depreciation: Over time, the value of capital goods decreases due to wear and tear, obsolescence, and other factors. This depreciation is taken into account when calculating the cost of capital.
- Capital is mobile: Unlike land, capital can be moved from one location to another. This mobility enables businesses to move their capital to regions where it is needed the most.
- Capital is an indirect factor of production: Capital is not used directly in the production of goods and services, but it is used to facilitate the production process. For example, a machine used in a production process is not the end product but is used to produce the final product.