In a broad sense, capital represents a large variety of types of investment that can be used in the production process. Thus, it is important to discuss some of the different types of capital that exist in order to get a better understanding of the term.
Debt Capital
Debt capital refers to funds that are borrowed and must be repaid with interest over a fixed period of time. This type of capital is often obtained through the use of loans from financial institutions such as banks. The repayment of debt capital typically occurs through a series of fixed payments that are made over time until the loan is fully repaid.
Equity Capital
Another type of capital is equity capital, which refers to funds that are invested in a business in exchange for partial ownership of the company. Equity capital can come from a variety of sources, such as venture capitalists, angel investors, and even friends and family members. One key advantage of equity capital is that it does not need to be repaid like debt capital; however, the downside is that the investor will own a portion of the company and will be entitled to a share of its profits (or losses).
Working Capital
Working capital is a measure of a company's short-term liquidity, which is the ability to pay its debts and other financial obligations that come due within one year. Working capital is calculated by taking a company's current assets and subtracting its current liabilities. The term current assets refers to those assets that can be quickly converted into cash, such as inventory or accounts receivable. On the other hand, current liabilities are those obligations that must be paid within one year, such as accounts payable or short-term debt.
Companies need to have positive working capital to be able to pay their bills and other obligations as they come due. If a company has negative working capital, it means that its current liabilities exceed its current assets and it may have difficulty meeting its short-term obligations.
Trading Capital
Trading capital refers to the funds that are available to a company in order to buy or sell various assets such as securities. This type of capital is important because it allows companies to take advantage of opportunities in the market and to make profits (or losses) from buying and selling assets. Trading capital can come from a variety of sources, such as loans from financial institutions or the sale of equity in the company.
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FAQs
In economics, capital can be defined as the physical or financial resources used to produce value in an economy. These resources may be invested in tangible assets such as factories, businesses, and equipment, or intangible assets such as intellectual property and technological innovations.
What is capital in economics with an example? ›
When economists refer to capital, they are referring to the assets that allow for increased work productivity. These include physical tools, plants, and equipment. Capital comprises one of the four major factors of production; the others are land, labor, and entrepreneurship.
What are the characteristics of capital in economics? ›
2) Characteristics of Capital
a) Capital is man-made (artificial) b) It increases the productivity of resources c) Supply of capital is elastic. It can be produced in large quantity when its requirement increases. d) Capital is perishable as it can be destroyed. e) Capital is highly mobile.
What is a simple definition of capital? ›
Capital is a broad term for anything that gives its owner value or advantage, like a factory and its equipment, intellectual property like patents, or a company's or person's financial assets. Even though money itself can be called capital, the word is usually used to describe money used to make things or invest.
What is an example of a capital good? ›
And in the case of capital goods, common examples include machinery, property, plant, equipment, tools, buildings, and vehicles.
What is capital two examples? ›
Different resources a business has can be counted as capital, such as:
- Physical assets, like buildings and machinery, used in a business setting to produce value.
- Money invested in stocks and bonds, or used to expand a business's production capabilities.
Examples from Collins dictionaries
Companies are having difficulty in raising capital. A large amount of capital is invested in all these branches. With a conventional repayment mortgage, the repayments consist of both capital and interest. Colmar has long been considered the capital of the wine trade.
What is financial capital in economics? ›
Financial capital is the monetary assets required for a business to provide goods and services. Economic capital is commonly calculated through risk management strategies and determines the capital required to cushion a business from losses.
Which of the following is an example of capital? ›
Examples of capital include office buildings, machinery, and tools. Thus, these are the man-made resources that assist workers in the production of a good or service. Buildings, factories, tools, and money are all examples of capital resources that enable production.
What is capital in one sentence? ›
The total amount invested in the business by the owner is called Capital. Excess of assets over the liabilities is known as Capital.
In other words, real capital is the assets used to produce some goods. Farmland is a major example of real capital: the farmer uses this asset to produce commodities, which he then sells to make a profit. Another example is equipment and machinery, which is used to produce goods.
Which example shows capital? ›
Think of capital as the machinery, tools and buildings humans use to produce goods and services. Some common examples of capital include hammers, forklifts, conveyer belts, computers, and delivery vans.
What is human capital in economics? ›
What is human capital and why does it matter? Human capital consists of the knowledge, skills, and health that people invest in and accumulate throughout their lives, enabling them to realize their potential as productive members of society.
What is economic capital in simple terms? ›
Economic capital is the amount of capital that a company needs to survive any risks that it takes. It's essentially a way of measuring risk. Financial services companies calculate economic capital internally.
What is a capital economy in simple terms? ›
In a capitalist economy, capital assets—such as factories, mines, and railroads—can be privately owned and controlled, labor is purchased for money wages, capital gains accrue to private owners, and prices allocate capital and labor between competing uses (see “Supply and Demand”).
What is capital in business with example? ›
In business, capital means the money a company needs to function and to expand. Typical examples of capital include cash at hand and accounts receivable, near cash, equity and capital assets. Capital assets are significant, long-term assets not intended to be sold as part of your regular business.
What is an example of capital in economic resources? ›
Capital resources include money to start a new business, tools, buildings, machinery, and any other goods people make to produce goods and provide services.
