Capital

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Definition of Capital:

Capital is an investment, either in the form of money or machinery and equipment that is used to produce goods and services.

Detailed Explanation:

Investing in capital goods enhances economic growth by increasing productivity and enabling businesses to produce more items or serve more customers per hour. Goods used when manufacturing other goods can be broken into two categories, intermediate and capital goods. Intermediate goods are inputs in a product. They are not the final product. Instead they are included in the final product. Examples of intermediate goods are wood in a house, plastic in a toy, metal in a boat, or sugar in candy. A capital good is the machinery, land, or tools used in the production and distribution of a good or service. Unlike intermediate goods, capital goods are not included in the end product. Instead manufacturers use capital goods in the production of the good or service to improve a firm’s productivity, or increase the output per worker. Investing in capital goods allows businesses and countries to increase their production possibilities and push out their production possibilities frontier.

Financial capital is money used to finance a company's growth. It is important to note that money itself is not financial capital. Instead money must be earmarked for acquiring capital assets. For example, a company may issue stock to raise the financial capital it needs to build a new plant. Debt is another source of financial capital. Here the borrowed money could be used to acquire the capital assets such as manufacturing equipment.

Capital assets are bought and sold. When an asset is sold for a gain, the owner incurs a capital gain and pays a capital gains tax. A capital loss is incurred when an asset is sold at a loss.

How we choose to spend our resources has long-term economic implications. Investing in capital generates future growth. For example, financial capital invested in education furthers economic growth more than paying the local pro for a lesson on improving a golf swing. Investing in research and development contributes more to future growth than paying an accountant to prepare a tax return. Investments like education and research and development enhance the ability to generate future income. 

Dig Deeper With These Free Lessons:

Capital And Consumer Goods - How They Influence Productivity
Capital - Financing Business Growth
Factors Of Production - The Required Inputs Of Every Business

Production Possibilities Frontier
Opportunity Costs - The Cost of Every Decision

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