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Capital in Economics: Definitions, Characteristics, Functions, Examples and Importance | Economics


In this article we will discuss about:- 1. Meaning and Definitions of Capital 2. Characteristics of Capital 3. Functions 4. Examples 5. Importance.

Meaning and Definitions of Capital:

Capital is defined as “All those man-made goods which are used in further production of wealth.” Thus, capital is a man-made resource of production. Machinery, tools and equipment of all kinds, buildings, railways and all means of transport and communication, raw materials, etc., are included in capital.

Capital has a number of related meanings in economics, finance and accounting. In finance and accounting capital generally refers to financial wealth especially that used to start a business.


Definitions of Capital:

Before exactly defining the ‘Capital’, we shall examine some of the definitions given by different economists:

“Capital consists of all those goods, existing at present time which can be used in anyway, so as to satisfy wants during the subsequent years”. -J. R. HICKS

According to this, all those things, which satisfy human wants are capital goods. It means that both, consumer goods as well as producer goods should be included in ‘capital’, as both satisfy human wants in one way or the other. But as a matter of fact, the consumer goods are not included in ‘capital’ because the consumer goods will be consumed in a single use only and will not be utilized for further production of wealth.


“Capital is the produced means of production”-BOHM BAWERK

According to this definition, only those goods are included in capital, which have been produced by human efforts.

“Capital goods are the products (tools) of the past labour (efforts) used for further production.”-VON SICKLE and ROGER

Thus, capital is productive in the sense that it enables a worker to produce more goods or services, during the physical life of the product.


“Capital goods are produced goods that can be used as factor input for further production.” -PROF. SAMUELSON

Thus, several economists have defined ‘capital’ differently.

However, from the above definitions, following facts about ‘capital’ can be concluded:

‘Capital’ includes all those goods (items or commodities) which are used for further production of more goods, e.g., machines, tools, factory buildings, transport equipment, etc.

‘Capital’ is the result of human efforts made, on natural resources, in the past. As suggested by CAIRNCROSS, stocks, shares, government bonds, securities, etc., are also included in ‘capital’ because all these yield income to the investors.

Capital has been classified in different ways depending upon its use (or purpose) and its actual physical status (nature).

Characteristics of Capital:

Important characteristics of ‘Capital’ are as follows:

1. Capital is a Passive Factor:

It is a passive factor of production. This is so because it becomes ineffective without co-operation of labour.


2. Capital is Man Made:

It is created by man. Its supply is increased or diminished by the efforts of man. According to John Stuart Mill, capital is the “accumulated product of past labour destined for the production of future wealth”, i.e., when human labour is applied to natural resources, then capital items are generated.

3. Capital is not an Indispensable Factor of Production:

Production can be possible even without capital, whereas, land and labour are the original and indispensable factors of production.


4. Capital has High Mobility:

Amongst all the factors of production, capital has the highest mobility. The land is immobile, labour has low mobility, whereas ‘capital’ has both ‘place mobility’ and ‘occupational mobility.

5. Capital is Elastic:

Supply of capital is elastic and can be adjusted easily and quickly according to demand. On the other hand, the supply of land is fixed and the supply of labour can neither be increased nor decreased quickly.


6. Capital Depreciates:

If capital is used again and again it depreciates. For example, if any machine is used for a considerable period, then it may not be suitable for further use due to depreciation.

7. Capital is Productive:

Production can be increased to a large extent if workers work with adequate capital.

8. Capital is Temporary in Nature:

Capital has to be reproduced and replenished from time to time.


9. Capital is not a Gift of Nature:

Production of capital involves some cost as it is not a natural gift, and is not freely available. It is earned with hard labour and sacrifice.

10. Capital is Prospective:

Capital is considered much prospective, as the accumula­tion of capital yields an income.

11. Capital is the Result of Past Savings:

In some cases when the consumption of capital good is not simultaneous with the production, it becomes a saving, e.g., when a farmer does not consume or sell a part of his crop production, it can be used as seeds in the future.

Functions of Capital:


The important functions of the capital are described below:

1. Provision for Subsistence:

Capital provides food, cloth and shelter to the workers engaged in production, because in actual practice, production is a long drawn out affair and has to pass through many stages before it reaches the market and brings income to manufacturer.

But the workers have to subsist during this period, for which the wages are paid from the capital money (capital fund). Subsequently, when money from consumers reaches the producer, it is again accumulated as capital money.

2. Provision for Appliances:

Capital is used to obtain tools and implements for use by the workers, when they are needed. It is clear that these things are essential for production, without their aid, large-scale production is impossible.


3. Provision for Raw Materials:

A part of the capital is used for procuring raw materials for production purposes. Every concern must be regarding a sufficient supply of raw materials of good quality and in adequate quantity.

4. Provision for Marketing and Sales Promotion:

The producer of goods has to arrange for the sale of the goods produced. For this, the goods produced are to be transported to the market. Simultaneously, the publicity and advertisements about the products has to be made. All these activities are met out with the help of the capital fund (capital money).

5. Economic Development:

The most important function of the capital is to promote the economic growth of the country. For a satisfactory development of the country, adequate funds are very essential. The progress of many undeveloped and under­developed countries gets retarded, because of the paucity, of funds.

Examples (Types) of Capital:


1. Trade Capital, Social Capital and Personal Capital:

PROF. MARSHALL defined these as below:

Trade capital refers to all those goods which a person uses in his trade or occupation, such as machinery, tools, raw materials, etc.

Social capital includes all those items, other than the free gifts of nature, that yield income to the society e.g., machinery, plant, factories, farms, canals, railways, mines, etc.

Those hidden qualities in a person which earn him an income and cannot be transferred from one person to another is called personal capital, for e.g., a singer’s melodious voice, teaching skills of teacher, etc.

2. Fixed Capital and Circulating Capital:

Fixed capital refers to the producer goods having long life which can be used again and again in productive processes. Their utility does not get exhausted in a single use. Machinery, plants and factory buildings, transport equipment, etc., are some of such components.

Circulating capital includes all those items, which can be used for a specific purpose only once. It is directly absorbed into the finished products. Cotton and paper are such examples, which are used only once in productive processes of making cloth and printing of books respectively. Other examples are photographic films (film industry), printing ink (printing press), wheat (flour mills), petrol and diesel (transport industry).

PROF. J. R. HICKS, called fixed capital goods as “Durable use producer goods” and the circulating capital as “Single use producer goods”.

3. Sunk Capital and Floating Capital:

Sunk capital is that category of capital, which can be used to produce only one type of commodity or service. For example, an ice factory and an oil mill, uses capital only to produce ice and oil respectively and no other commodity.

Floating capital includes all such items, which can be put to alternate uses. The use of such commodities is not restricted for any specific purpose. The important examples are money, fuels, etc.

4. Concrete Capital, Money Capital and Debt Capital:

CAIRNCROSS has classified and defined these forms of capital as detailed below:

Concrete capital includes all that property, which is in the hands of both producers and consumers and has money value. Some examples are furniture, buildings, cars, trucks, industrial units, household goods, books, etc.

Money capital is utilized by the producers for the purchase of tools, machines, buildings, transport, etc. Money itself does not have any value, but it actually helps in purchasing and procuring things, which are utilized for producing different kinds of goods.

It should, however be kept in mind that the money lying idle with a person cannot be termed as money capital, because it is not being used for arranging any kind of productive goods or activities.

Debt capital represents the invested funds which yield income. All investments made in shares, stocks, government securities, etc., which help the investors to earn income and also considered productive, are called debt capital.

5. Internal Capital and External Capital:

When the capital of a country is used within its territory, it is called internal capital. When the capital is obtained from foreign countries and used in our country, it is called external or foreign capital.

6. National Capital and International Capital:

National capital includes all the private and public capital in a country. The buildings of all the factories, i.e., private or public, are the examples of national capital.

International capital is owned by two or more than two countries. For example- Kosi Project is owned by India and Nepal. International Monetary Fund, World Bank, etc., cover international capital.

7. Consumption Capital and Production Capital:

Capital which is invested for the direct satisfaction of human wants, e.g., capital spent on food, clothing, housing, etc., is termed as consumption capital.

Capital which directly helps in the production of goods, e.g., machines, tools, factories, etc., is termed as production capital.

8. Private Capital and Public Capital:

Capital which is invested in private sector or by private people is known as private capital. For example, Industries belonging to Tata’s and Birla’s.

It can be of two types:

(i) Individual Capital:

It is a capital which is owned by one person only. For example- machines, building of a factory, bank balance, etc., of a single person.

(ii) Collective Capital:

It is the capital owned by a group of people. For example, a factory or a transport business, etc., run by a family or a group.

Capital which is invested by the government in public sector, is called public capital. For example- Bhilai and Durgapur Steel Plants. Income from it is received by the government.

9. Remunerative Capital and Auxiliary Capital:

Capital which is given to workers in the form of wages is known as remunerative capital. For example, wages given to a factory worker.

The auxiliary capital helps a labourer to produce goods. A big hammer, a pair of pliers, wood, etc., are auxiliary capital for a carpenter. Therefore, machines, raw material, electricity, etc., are the examples of auxiliary capital.

Importance of Capital:

Capital is now considered as one of the important factor of production.

It plays a vital role in the modern productive system, as described below:

1. Capital Helps in Increasing Production and Productivity:

Capital plays a very important role in production these days. At present, production without ‘capital’ cannot be imagined. ‘Land’ (nature) and ‘labour’ (man) cannot be utilized for the production of goods and commodities unless there are machines, tools and equipment.

Consequent to developments in technology and specialization in the production system, the role of capital has become even more significant and important.

Capital plays a very important role in increasing productivity. For example- a worker working on a handloom can produce only a few meters of cloth. A worker working on a power loom can produce many times more cloth. It means that capital improves efficiency and increases productivity.

In a day a farmer can plough many acres of land with a tractor and much less with a plough. If poor countries have to become rich they must also have better machines and better technology.

In fact, the extensive use of machinery and tools in advanced countries like U.S.A., U.K. and Japan, etc., has actually yielded higher production. The extensive use of capital goods by the workers has significantly improved their efficiency and production of goods.

2. Capital is the Core of Economic Development:

Because of its strategic role in raising productivity, capital occupies a central position in the process of economic development. The economic development of any nation is not possible without a sufficient provision of machines, tools, irrigation systems, dams, bridges, factories, roads, railways, etc.

Irrespective of the fact, whether a country has a socialistic economy (erstwhile Russia, China, etc.) or capitalistic economy (U.S.A., U.K., Canada, etc.) or mixed economy (India), all need adequate capital stock for their economic development.

A country, without adequate capital stock of advanced and modern design, will remain backward and undeveloped. Hence, it is very rightly said that capital is the core of economic development.

3. Capital Generates More Employment Opportunities:

With the growth of population, there must be an adequate increase in the stock of capital, in order to provide employment to additional labour force. If the increase in stock of capital, i.e., increase in machines, tools, factories, etc., is insufficient or not keeping pace with increase in working labour, unemployment will increase. Thus, capital helps in providing more opportunities of employment.

4. Capital Helps in Maintaining Defence of the Country:

In modern times, wars are fought with modern and expensive equipment, like tanks, missiles, bombs, warplanes, etc. All these can be manufactured and supplied to a country’s army, if there are well-established factories with good stock of capital, for manufacturing these defence equipment.

Thus, the stock of capital must be sufficient to meet the requirements of its ordinance factories, military and naval bases. It is impossible to maintain well-equipped defence forces without sufficient stock of capital. The strength of a nation is actually found to be directly correlated with stock of capital. The countries like U.S.A., U.K. and erstwhile Russia are called as big powers, because they have huge capital stock of defence equipment.

Therefore, capital plays a very important part in maintaining the defence of the country.

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