View FREE Lessons!

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 intermediate and capital goods. Intermediate goods are inputs in a product. They are not the final product. Instead, producers include them 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 to produce and distribute a good or service. Unlike intermediate goods, capital goods are not included in the end product. Instead, manufacturers use capital goods to provide 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. Money itself is not financial capital but can be used to acquire 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 must pay a capital gains tax. 

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

Search the Glossary

Investment Calculator:

Market Overview:

Market quotes are powered by

Single Quote:

© Higher Rock Education and Learning, Inc. All rights reserved. No portion of this site may be copied or distributed by any means, including electronic distribution without the express written consent of Higher Rock Education and Learning, Inc.