Capital goods are referred to as the fixed or tangible assets that are purchased by a business in order to produce finished products or consumer goods. Capital goods are not readily convertible into cash. They are durable and they do not wear out quickly.
The most common examples of capital goods can be equipment, machinery, buildings, computers, and more. The concept of capital goods is most commonly used in macroeconomic terms where it is used in determining the capital formation and the production capacity.
In order to produce goods, four factors are essential, which are capital goods, land, labour, and entrepreneurship. These four factors are collectively known as the primary factors of production.
Capital goods can be said to be the goods that can be used to increase production. The most common types of capital goods are referred to as plant, property, and equipment. For purchasing capital goods, the producer must make a considerable amount of investment. Therefore, the purchase of a capital good is referred to as a capital expense in accountancy.
In accountancy, as capital goods are not consumed in a year, they are depreciated to the extent of their useful lives using the methods of depreciation.
Importance of Capital Goods in the Economy
Capital goods are high investment products and play an important role in the economy. They act as an entry barrier for new companies that lack the necessary funds to acquire such equipment. If a business is unable to produce goods due to the lack of equipment, then it cannot compete in the market.
Capital goods play a vital role in increasing the production of goods in the long term, or in other words, it increases the production capacity of goods and services.
However, if there is an excess of capital goods, then it can lead to a reduction of consumption. Thus, an economy must maintain the balance between the consumer goods and the capital goods.
This brings us to the conclusion of the concept of Capital Goods, which plays an important role in the production and growth of an economy. For more such interesting concepts, stay tuned to our website.
Frequently Asked Questions on
What are the examples of capital goods?
Capital goods are mostly fixed assets that are purchased by the producer in order to produce consumer goods. Examples: Buildings, equipment, machinery, furniture, and more.
What are the most important factors of production?
The three most important factors of production are land, labour, capital goods, and entrepreneurship.