Capital goods

capital goods in economics

1. Capital Goods
Capital goods are physical assets that a company uses in the production process
to manufacture products and services that consumers will later use. Capital goods
include buildings, machinery, equipment, vehicles, and tools. Capital goods are
not finished goods instead; they are used to make finished goods.
 Capital goods are referred to as the fixed or tangible assets that are purchased
by a business in order to produce finished products or consumer goods.
 Capital goods are not easily convertible into cash. They are durable and do not
easily wear out.
 The most common examples of capital goods can be equipment, machinery,
buildings, computers and buildings, etc.
 Capital goods concept is most commonly used in macroeconomic terms
where it is used in determining capital formation and production capacity.
 In order to produce goods, three factors are very essential which are capital
goods, land, labour and entrepreneurship. These four factors are collectively
known as the primary factors of production.
 Capital goods can be said to be any goods that can be used for increased
production.
 The most common capital goods are referred to as Plant, Property and
Equipment. For purchasing capital goods the producer must make a
considerable amount of investment.
 Therefore, purchase of a capital good is referred to as a capital expense in
accountancy.
Understanding Capital Goods
Capital goods are called tangible assets because they are physical in
nature. Capital goods are assets that companies use to produce products
that other businesses can use to create finished goods. Manufacturers of
automobiles, aircraft, and machinery fall within the capital goods sector
because their products are subsequently used by companies involved in
manufacturing, shipping, and providing other services. In other words,
capital goods don't create satisfaction (called utility in economics) for the
buyer per se but instead are used to produce the final product, which does
create satisfaction.

2. In accountancy, as capital goods are not consumed in a year, therefore they are
depreciated to the extent of their useful lives using the methods of depreciation.
Depreciation
Capital goods that a business does not consume within a single year of production
cannot be entirely deducted as business expenses in the year of their purchase.
Instead, they must be depreciated over the course of their useful lives, with the
business taking partial tax deductions spread over the years that the capital goods are
in use. This is done through accounting techniques such as depreciation. Depreciation
accounts for the annual loss of the tangible asset’s value during the course of its useful
life. Depreciation helps a company generate revenue from an asset by expensing only a
portion of it each year. Expensing the asset means the annual cost reduces profit or net
income, which creates a lower taxable income and provides the company with a tax
savings.
Depletion
If a company is extracting natural resources, such as timber, depletion is an accounting
technique utilized for spreading out the cost of those natural resources as they are
depleted or used up by a business. Depletion can be calculated by using either cost
depletion or percentage depletion.
Importance of Capital Goods in Economy
Capital goods being high investment products play an important role in the economy, it
acts as an entry barrier for new companies which lack the necessary funds for acquiring
such equipment. If a business is unable to produce goods due to lack of equipment, it
won’t be able to compete in the market.
Capital goods play a vital role in increasing the production of goods in the long term, or
in other words it increases the production capacity of goods and services.
But if there is an excess of capital goods, it can lead to reduction of consumption, so an
economy must maintain a balance between the consumer goods and capital goods.
What Are Capital Goods?
Capital goods are man-made, durable items businesses use to produce goods
and services. They include tools, buildings, vehicles, machinery, and equipment.
Capital goods are also called durable goods, real capital, and economic capital.
Some experts just refer to them as "capital." This last term is confusing because
it can also mean financial capital.
In accounting, capital goods are treated as fixed assets. They’re also known as
“plant, property, and equipment.”

3. Capital goods are one of the four factors of production. The other three are:
NELC
N Natural Resources
E Entrepreneurship
L Labour
C Capital
1. Natural resources, such as land, oil, and water
2. Labor, such as workers
3. Entrepreneurship, which is the drive to create new companies
Natural resources
 Fixed in supply
 Cannot be renewed
 Found in nature
 E.g. Oil, water, marine life, forests etc
Definition : All the things that we find in nature without having to produce them
Example: Water, Minerals, Land, Forest, Animals and Plants.
Remuneration: Rent
Entrepreneurship
 Brings all the factors of production together in a profitable way
 Characteristics of an entrepreneur
 Trustworthy
 Enthusiastic
 Risk taker
 Professional
 Honest
 Hard working Energetic
 Passionate

4. Definition: an entrepreneurship combines all the factors of production to produce
goods and services.
Example: A person who is willing to take risks and is motivated.
Remuneration: Profit
Labor
 The mental and physical effort of people involved in a business
Definition: All the physical and mental effort used to create goods and services.
Physical labour involves using your body and physical ability and mental labour
involves using your mind and mental ability to get something done.
Example: Mineworkers and teachers
Remuneration: Wages or salaries
Capital
 Does not include money
 Manufactured resources e.g. machines, tools, and buildings (capital
goods)
 Capital goods are needed to produce goods and services
Definition: Capital goods used to produce other goods and services. It can also
mean the actual money used to start a business.
Examples: Machines, Tools, Factory buildings, Office buildings and trucks.
Remuneration: Interest
Core Capital Goods
Core capital goods are another leading indicator of economic growth. They don't
include defense equipment and aircraft. These are large orders that don't appear
consistently. Core capital goods orders tell you how much businesses use on an
everyday basis.
The Census Department measures both orders and shipments. The latter shows
up in that quarter's gross domestic product (GDP) estimate. Orders don't show
up until later when the goods are manufactured and shipped. When orders for

5. core capital goods rise, the nation's GDP will increase six months to 12 months
later.
Capital Goods vs. Consumer Goods
Unlike capital goods, consumer goods are not used to create other products
(although they also may be considered durable goods). Like capital
goods, durable consumer goods are heavy-duty and long-lasting. They’re the
appliances bought by households, such as cars, refrigerators, and dryers.
Shipments of consumer goods are also included in U.S. GDP. As a
result, consumer spending drives almost 70% of GDP.
Examples
Many items can be both capital goods and consumer goods. The difference is
how the items are used.
 For example, commercial aircraft are capital goods because they are used
by airlines to produce a service: transportation. An airplane used by private
pilots for weekend hobbies is a consumer good. That same type of plane
used for a sightseeing business is a capital good.
 Another example is trucks and cars: businesses use them as capital
goods, but families use them as consumer goods. Buildings also double as
capital and consumer goods—the former if they're turned into a factory,
office, or warehouse, and the latter if they are used for housing.
 Computers are capital goods if they are used by a business but not if they
are used by a family. The same goes for any ovens, refrigerators, and
dishwashers. If they are for commercial use only, they are capital goods.
Capital Goods vs. Consumer Goods
Consumer goods are the finished products that consumers buy as a result of the
production process. Although consumer goods have different classifications,
examples of consumer goods include milk, appliances, and clothes. Conversely,
capital goods are not ususally sold to consumers but instead are used to produce
other goods, which might be sold to consumers. However, there are capital
goods that can also be consumer goods, such as airplanes, which are used by
airlines but also by consumers.
Examples of Capital Goods
Below are some examples of capital goods that are used in the various industries
as well as examples of goods that can be both capital and consumer goods.

6. Capital Goods
 Factories or assembly line equipment used to manufacture cars and trucks
 Machines and technology
 Types of infrastructure, such as trains and cable or broadband lines
 Coffee machines used by a coffee shop
Capital and Consumer Goods
 Automobiles used by a delivery company would be a capital good but for a
family, would be a consumer good
 Ovens used by a restaurant would be a capital good but can also be a
consumer good
 Computers, which could be used by companies but also by consumers
 Landscaping equipment used by landscaping companies and by
consumers