What is Capital?

Capital in Economics

In Economics, Capital is known as the produced means of production. First, it is created by man and is not a gift of nature. Second, it is a means of production and used as an input in producing other goods. Such type of goods is not directly consumed.

Types of Capital in Economics

  • Fixed Capital and Circulating Capital
  • Sunk Capital and Floating Capital
  • Remunerative and Auxiliary Capital
  • Material and Personal Capital

Material and Personal Capital

  • Trade Capital and Social Capital
  • Real Capital, Money Capital and Debt Capital
  • Production and Consumption Capital
  • Internal and External Capital

Characteristics of Capital

  • Capital is man-made: Capital is the result of savings which are made by man. It is the outcome of the past workers on natural resources.
  • Capital is durable: Capital goods are durable goods which might last for few years or many years.
  • Capital is a passive factor of production: It cannot produce by itself and it becomes effective only when it is used by labour.
  • Supply of capital is elastic: The supply of capital is elastic which can be easily increased or decreased as it is man-made.
  • Capital is a mobile factor: Capital is the most mobile factor of production which is easily transferable from one place to another and one occupation to another.

Capital Formation in Economics

In Economics, Capital formation is the creation of capital. A change in the stock of any capital during a particular period of time is called capital formation.

Capital in ECONOMICS

Three important stages of capital formation in Economics

  • Creation of saving: Savings are transformed into capital. If an individual does not save money, then there cannot be any capital formation, even if other conditions are favourable for capital formation.
  • Mobilization of savings: Despite a high income, if a person holds savings in the form of cash instead of depositing them in the bank, then the savings cannot be mobilized for investment. Hence, savings must be mobilized from the savers. These functions are performed by financial and other institutions and the capital markets.
  • Investment of mobilized savings: The mobilized savings must be actually used by producers for investment. Money kept by the people in banks must be lent out by the banks to producers for business investments such as the purchase of machinery and raw materials.

Reasons for the slow rate of capital formation in India

  • Lack of ability to save: Because of poverty, poor people are unable to save more than a negligible part of their earnings. Hence, a low rate of savings leads to a low rate of capital formation in the Indian economy.
  • Lack of willingness to save: In certain parts of the country, there still exists a feudal economic system. Even people who have the ability to save money are not willing to save and spend all their income on day-to-day consumption.
  • Insufficient mobilization of savings: People are not mobilizing their savings for capital formation. Most of their savings are kept in the form of gold and cash at home. These savings are not used productively because of poor banking knowledge and poor banking network in underdeveloped states

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