What are capital goods?
Any tangible assets an organization uses to generate goods and services are capital goods. These include office buildings, equipment, machinery, vehicles, and tools used by consumers later. Capital goods are not finished goods. For instance, manufacturers of automobiles, aircraft machinery, and other engineering goods are producing products subsequently used by companies involved in manufacturing, shipping, and other service sectors.
Companies don’t sell capital goods. They sell consumer goods. That is the reason why capital goods do not fetch direct profit like consumer goods. Companies use loans, investments, or savings to obtain capital goods to manufacture goods and services. Capital goods are purchased for the manufacturing of consumer goods. The demand for capital goods is comparatively lesser than for consumer goods. However, their usefulness is high.
Capital goods are depreciated to the extent of their useful life using the depreciation procedure. Depreciation accounts for the annual loss of the tangible asset’s value during its useful life.
On the contrary, depletion is the accounting technique used to spread out the cost of any resources as used or depleted by a business.
What are the different types of capital goods?
Capital goods are produced by the industrial electronic industry – smartphones, digital cameras, air purifiers, personal computers, etc.
Capital goods produced by service businesses – coffee machines for coffee shops, paint brushes used by painters, musical instruments used by musicians, hair clippers used by hairstylists
Capital goods required by dairy firms – milk tanks, cream separators, butter churns, etc.
Core capital goods produced by the Defence department – automatic rifles and military uniforms
Public-oriented capital goods – infrastructures like roads, rail, and telephone lines, are capital goods. Investment in these capital goods comes from the government.
Why are capital goods a significant part of the economy?
One of the four foremost economic elements is capital goods. It is impossible to run a business without equipment, tools, machinery, and a building. The production of these physical assets ensures the manufacturing process of finished goods. While the cost of this equipment and tools is high, the manufacturing process is impossible without them. That is why several businesses also seek help from other companies to supply products. Businesses use capital goods which are long-lasting commodities and are man-made to generate goods and services.
India’s capital goods manufacturing industry serves as a strong base for its engagement across sectors like infrastructure, consumer goods, engineering, construction, and many more to add.
Capital goods play a significant role in increasing the production of goods required in the long run. However, the consumption of capital goods decreases, if there is an excess of these goods. Therefore, the economy of the country must strike a balance between capital goods and consumer goods.
When it comes to the long-term productivity of the economy, capital goods are important. It leads to higher living standards in the economy.