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 do not wear out quickly.
The most common examples of capital goods can be equipment, machinery, buildings, computers and buildings, etc.
Capital goods concept is most commonly used in macroeconomic terms where it is used in determining the capital formation and 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 any goods that can be used for increased production. The most common 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, therefore they are depreciated to the extent of their useful lives using the methods of depreciation.
Importance of Capital Goods in Economy
Capital goods being high investment products play an important role in the economy; it acts as an entry barrier for new companies which lack the necessary funds for acquiring such equipment. If a business is unable to produce goods due to lack of equipment, it will not be able to 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.
But if there is an excess of capital goods, it can lead to a reduction of consumption, so an economy must maintain a balance between the consumer goods and 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 on Economics for Class 12, stay tuned to BYJU’S.
Frequently Asked Questions on
What are examples of capital goods?
Capital goods are mostly fixed assets that are purchased by the producer in order to produce consumer goods; the examples are building, equipment, machinery, furniture, etc.
What are the most important factors of production?
The three most important factors of production are land, labour, capital goods and entrepreneurship.