Capital as a Factor of Production: Types and Importance

Capital is the wealth that is reserved or set aside for the purpose of generating more wealth through productive activities.

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In this post, we shall examine the meaning of capital, its types and importance. At the end of this lesson, students are expected to be able:

  • define capital;
  • examine the types of capital; and
  • highlight the importance of capital.

Meaning of Capital

Capital is the wealth that is reserved or set aside for the purpose of generating more wealth through productive activities. It is as a critical factor of production.

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Capital is the lifeblood of economic activity, enabling businesses to invest in resources, technology, and human talent to create goods and services.

Types of Capital

There are four types of capital. They are fixed capital, circulating capital, current capital, and social capital.

Image Creditstevepb on Pixabay.

Fixed Capital

Fixed capital is durable assets that are used in the production process and do not change their form during production.

Examples of fixed capital include buildings, machinery, equipment, vehicles, and furniture. These assets are essential for establishing and maintaining the infrastructure necessary for business operations.

Circulating Capital

Circulating capital refers to the resources that undergo transformation during the production process and ultimately become finished products.

Raw materials are a prime example of circulating capital. They are consumed or incorporated into the final goods during the production cycle.

Current Capital (Working Capital)

Current capital, also known as working capital, represents the resources required for the day-to-day functioning of a business.

It includes cash, inventory, accounts receivable, and short-term assets and liabilities.

Current capital ensures smooth operations, covers short-term financial needs, and helps in managing cash flows effectively.

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Social Capital

Social capital refers to the infrastructural facilities and public goods provided by the government or society that aid in the production process.

These facilities support and enhance economic activities, making them an essential part of the economic ecosystem.

Examples of social capital include well-maintained roads, reliable electricity supply, efficient railways, seaports, airports, and communication networks.

Importance of Capital

  1. Capital plays a crucial role in economic growth, as it provides the necessary resources for businesses to invest in productive activities.
  2. It fosters entrepreneurship and innovation, enabling the development of new products and services.
  3. Capital investment leads to increased productivity and efficiency.
  4. Adequate capital resources help businesses withstand economic downturns and maintain stability during challenging times.
  5. Capital accumulation is essential for long-term growth and expansion of businesses.
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