Capital: Factor of Production

In economics, capital refers to the stock of goods used for the production of other goods. Capital is regarded as a factor of production by classical economics who distinguish between financial capital and physical capital. Financial capital means the accumulated or inherited wealth held in the form of assets, such as stocks and shares, property, and bank deposits. Physical capital is wealth in the form of physical assets such as machinery and plant. The term is also used to describe investment in a company as either share capital or debt (called loan capital). Fixed capital is durable, and examples of fixed capital include factories, offices, plant, and machinery. Circulating capital is capital that is used up quickly, such as raw materials, components, and stocks of finished goods waiting for sale. Private capital is usually owned by individuals and private business organizations. Social capital is usually owned by the state and is the infrastructure of the economy, such as roads, bridges, schools, and hospitals. Human capital is what enables people to earn a living, and may be enhanced by better education, training, and health care. Investment is the process of adding to the capital stock of a nation or business.

Thus capital can be defined as the stock of resources that are used to produce other goods in the present and in the future. In classical economics the three factors of production are capital, labour, and land. Capital embodies the man-made resources, which include the buildings, plant, equipment, and inventories created by all three factors. In this sense, capital goods may be contrasted with consumer goods. The creation of capital goods means that consumption is forgone, resulting in saving. The flow of saving becomes a flow of investment. Expenditures on education and training are often referred to as investment in human capital. Financial capital is the term given to the stocks and bonds issued in order to finance the acquisition of capital goods.