Without capital goods, there would be no businesses to run.
So, what are capital goods?
Why are they so important for our economy?
Capital goods are commodities that are used for the production of other goods and services that are offered to consumers.
They involve factories, tools, and pieces of machinery used in producing products or providing services.
They are usually known as a company’s fixed or long-term assets since they provide value for more than a year.
Capital Goods Defined
Some common examples of capital goods include machinery, buildings, vehicles, electrical equipment, tools, manufacturing plants, and more.
In simple terms, capital goods are the assets used by businesses in producing final products.
In fact, capital goods are commonly labeled as ‘property, plant, and equipment’ in a company’s financial statements.
Capital goods are tangible assets that experience depreciation and wear and tear after a certain period.
The depreciation expense for capital goods is recorded in a company’s accounting books every financial period, and the asset is disposed of or discarded once its value reaches zero.
Capital goods are not finished goods. Instead, they are considered a subset of durable goods and used in the manufacturing of finished products.
It is also considered one of the four factors of production, including land, labor, and entrepreneurship.
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Capital Goods vs Consumer Goods
Capital goods are tangible assets used by enterprises for the production of finished goods and services. Whereas consumer goods are products that are purchased for final consumption and not for manufacturing other goods or services.
This is why consumer goods are also known as final goods since the ultimate consumer or end-user buys them. You can even sell capital goods to other businesses for production purposes.
Some examples of consumer goods are food, clothing, and electronics. And in the case of capital goods, common examples include machinery, property, plant, equipment, tools, buildings, and vehicles.
Besides manufacturing, businesses acquire capital goods to improve their efficiency and productivity. Hence, they are expensive and require a large investment.
Consumption goods can be divided into three categories – durable goods, non-durable goods, and services.
Durable goods last longer than a year and include electrical appliances, motor vehicles, and furniture.
Non-durable goods have a lifespan of less than a year and are also known as perishable products. Examples of non-durable goods include food, clothing, and gasoline.
Services are intangible assets such as haircuts, banking, legal services, etc.
So, can a product be a capital good and a consumer good at the same time?
Depending on the end user, a product can be classified either as a capital or a consumer good.
For instance, if a car has been purchased for personal use, it will be considered a consumer good.
On the other hand, if a car has been acquired by a business to transport finished products, it will be classified as a capital good.
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Importance of Capital Goods
There are various reasons why capital goods are important for a country’s economy. Let us look at some of them.
#1. Improves productivity
Producing goods manually is a complex and time-consuming process.
It also results in less production and higher costs.
By acquiring capital goods such as machinery and equipment, businesses can increase their productivity.
More goods can be manufactured in less time and at lower costs.
As a result, companies can boost employee productivity and revenue.
#2. More rewarding
With the right capital goods, businesses can yield a high return on investment.
By purchasing suitable machinery, you can produce a large number of high-quality goods in a very short span of time, boosting sales and profits.
With positive financial performance, more investors will be keen to invest in your business, giving you more access to capital and resources.
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#3. Acts as a reliable economic indicator
Capital goods are considered an excellent indicator of the economy.
When companies are spending more on acquiring capital goods such as equipment and machinery, it is a sign that they will increase production.
Production of goods and services will only increase when economic conditions are favorable or will result in greater sales.
Hence, expenditure on capital goods is one of the indicators to understand the direction of economic growth in the future.
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Examples of Capital Goods
Below is a list of a few examples of capital goods.
Machinery is used in the production of other goods and services. Some examples of machinery involved in manufacturing include industrial robots, grinders, drilling machines, shearing machines, saw machines, and so on.
Vehicles owned by businesses are considered capital goods. They are used for the transportation of products from one place to another. Typically, vehicles used as capital goods include trucks, vans, and cars.
Certain software such as CRM, accounting software, human resource software, communication tools, web browsers, office suites, and so on.
Facilities include spaces that are used for the production of goods and services. These can consist of factories, office buildings, and data centers.
#5. Furniture and Fixtures
Furniture and fixtures comprise tools such as desks, tables, chairs, and other office equipment. While they may not be directly involved in manufacturing, since they are used by production units, furniture and fixtures are categorized as capital goods.
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Capital goods, also known as fixed assets, long-term assets, or tangible assets, are used for the production of other goods and services. Capital goods are beneficial since they help increase productivity and efficiency, which, in turn, boosts revenue and profits for businesses.