What is capital in economics?

What is capital in economics?
5 min read

Capital is the set of assets, goods or money that a company or person uses to generate wealth and earn income by producing other goods and services. Thus, capital comprises the sum of resources invested in an economic activity to obtain profits.

Money and capital are two related terms, but they are not absolute synonyms. The money can be used as capital when it is invested in the purchase of machinery, facilities or technological improvements that increase productivity.

In this sense, part of a tailor's capital is his sewing machine, since with it he makes the suits that he can sell in exchange for a profit.

The purpose of making a profit is what turns money into capital. While money by itself only represents a means of exchange if it is not invested in the generation of more value.

In the economy, capital along with land and labor are the factors of production. Capital is made up of the tools and resources invested to produce more. Land provides the locus of economic activity and is where raw materials are extracted. The work is expressed in the effort and time of the people dedicated to production.

Financial capital

Financial capital is money put into entities such as banks, mutual funds, or the stock market. That money comes from the savings of a person or an investment company that decides to allocate resources to companies in order to make a profit.

This capital increases when lenders receive payments, profits, or dividends from businesses that have earned income from the use of invested money. So financial or business capital can be understood as money used to produce more services or consumer goods.

Since not all businesses are successful, sometimes the balance of economic operations is negative. In such cases, losses are recognized . When the result is positive, it indicates that there are capital gains .

The difference between financial capital and physical capital

Financial capital consists of cash or other instruments that can be converted into money quickly, such as shares or tradable securities. While physical capital is made up of the goods that contribute to the production process of a company. Among these we find furniture, industrial facilities, computers, etc.

sources of financial capital

The credit

It refers to funds received on loan from sources such as banks, private investors or even government institutions. Loans allow entrepreneurs to have access to money to open or improve businesses.

Credits are considered a liability or obligation in companies, since they must be paid to lenders and usually carry an interest charge.

share capital

Share capital refers to the assets that investors contribute to a company. Thus, through the acquisition of shares or contributions made, investors become co-owners of a company. Such shareholders share both the percentage share of their earnings and the risks of loss.

Large companies trade their shares publicly on the stock market. This means that any citizen or entity can buy shares of these companies as long as they meet certain legal requirements.

Other examples of capital

stockholders' equity

This is the net worth a company has after adding the value of all its assets and subtracting all its liabilities.

In other words, it is the money that would remain if a company sold all its possessions: product inventory, as well as buildings, furniture, etc., and that resulting amount was subtracted from the payment of all its debts. This value must appear on the balance sheet and on the declarations of equity.

Human capital

This concept encompasses the professional capacities that employees and workers have. Human capital provides added value to companies thanks to the increase in productivity created by the knowledge and experience of qualified people.

See also Human capital.

physical capital

Physical capital counts the tangible and man-made assets used to facilitate production processes. These can include factories, machinery, vehicles or any other element that facilitates the production of goods and services that will enter the markets.

speculative capital

Speculative capital is considered to be the funds that an investor allocates to high-risk businesses. Speculation consists of buying assets or financial instruments with the expectation that their price will rise in the short term. Of course, these speculative investments can lead to big gains or big losses.

bank capital

This is the net worth that a bank has after considering the difference between its assets and its liabilities. Among the assets of a bank are the money it has, securities, insurance, and interest on loans receivable. Among its liabilities are debts and losses due to interest on credits not recaptured.

Bank capital is understood as the bank's store of value. This must be solid to protect creditors in the event of an eventual liquidation of the entity.

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