There are three main factors of production in our economy – physical capital, human capital, and land and natural resources. Physical capital is one of the most important of these three factors which contains tangible and man – made goods. Basically, those products or services, like – machinery, buildings, vehicles, etc., owned by a company are considered to be the physical capital of this company. In this article, we are going to discuss five interesting facts about physical capital.
1.Supports The Growth Of Production
In economics, those man – made assets that support any kind of economic activity are called capital. Physical capital is such durable non – financial assets that are used in producing goods and services. Physical capital is also known as real capital or capital stock or capital assets. In his Classical Economics theory, Adam Smith has also prioritized physical capital. This particular capital, along with the other two kinds of capital, supports GDP growth.
2.A Tangible Asset
Physical capital is a tangible asset on the balance sheet. It is one of the most important components of a company’s valuation. Doing proper assessment of the physical capital of a company is not quite easy. This is because there is an ambiguous boundary among the factors of production.
3.Types Of Physical Capital
There are many types of physical capital that are important for our economy. The physical capital is not consumed out or finished while processing the production. But, sometimes the value of physical capital diminishes with the course of time, basically due to depreciation. If we take machines and equipment as physical capital, we should remember that their book value is subject to depreciation assumptions.
4.Illiquid Tendency Of Physical Capital
Physical capital has a very illiquid nature. This illiquid nature of physical capital often challenged its valuation. Sometimes, the physical capital is engineered or customised only for some fixed purposes. If you are running a beverage company that owns a particular design for bottles, you have to use a particular machine that can produce bottles with that particular shape or design. So you may find some difficulties if you want to resell that machine anytime. In this way, the illiquid nature of physical capital affects its market value.
5.Investment In Physical Capital
If you are beginning a new company, you have to invest in physical capital a little early. In fact, you can do this investment before you produce a single good or secure your first customer. Let us take an example. If you own a company that manufactures an induction oven, you must make some investment before you start selling, such as – you need to construct a factory and buy the necessary machines or equipment.
We hope you are satisfied with this information about physical capital. If you are interested to know more about it, do comment in the comment section.