Many of you may have come across the term ‘capital’. Perhaps you are wondering what is capital stock in economics. Well, capital stock is a type of asset. However, before we go into what is capital stock in economics, let us first try to understand what capital is. In economics, capital refers to the productive resources used in the production for sale. An excellent example is a factory that manufactures widgets to sell or create more widgets.
The National Capital Approach
Under the natural capital approach, the production of economic goods takes the form of natural resources. Goods
produced this way include food, fuel, raw materials, and knowledge. One important feature of the natural capital approach is that it largely ignores the production of information technology. Hence, it does not make any assumptions about the nature of the products.
Nature of the Goods Produced
By contrast, the capital-what is capital approach makes assumptions about the nature of the goods produced. It then uses a standard monetary supply to define the value of capital (Equity). The definition of what is capital in economics, therefore, is the value of the output of the production process. In this sense, Capital refers to the land, plant, and machinery used in the production process of an economy.
Determination of the Value of Output
Another important feature of the capital approach is that it takes into account the role of capital assets in the determination of the value of output. A vital feature of the capital pricing model is that it takes into account the role of capital assets. Now there is intangible capital as well, such as fixed capital and raw material costs. It also involves profit and loss elements in production accounting.
Price of the Productive Assets
What is capital in economics thus refers to the price of the productive assets. The factors of production chosen for analysis comprise raw material, plant and machinery, inventory, capital goods like labor and physical assets, the total value of production, and the potential growth of capital goods. Capital is determined by the total market value of the output, which is measured in terms of production rather than consumption. It involves determining the number of new inputs that are required to increase the quantity of output that is produced.
A Form of Physical Wealth
Economists define capital as a form of physical wealth or a resource to produce a surplus product demanded by the market (when put to use). In other words, capital is a non-rivalry productive resource. Products that have been improved through science and technology are known as capital goods and although they cannot be physically controlled, they are still owned by their producers.
The Three Basic Categories
The three basic categories of physical capital include capital goods (produced on the land), raw materials (produced on the land), and capital equipment and supplies (produced on the plant). The categories of financial capital are accounts receivable, inventory, and bank liabilities. The three basic categories of physical capital are plant, machinery, and physical assets. The three categories of financial capital are accounts receivable, inventory, and bank liabilities. This concept is central in all economic theories.
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