Capital in Economy

What is capital in economics?

Capital is the set of assets, goods or money used by a company or a person to generate wealth and obtain income by producing other goods and services. Thus, capital comprises the sum of resources invested in an economic activity to obtain profits.

Money and capital are two related terms, but they are not absolute synonyms. Money can be used as capital when it is invested in the purchase of machinery, installations or technological improvements that increase productivity.

In this sense, part of the capital of a tailor is his sewing machine, since with this he makes the suits that he can sell in exchange for a profit.

The purpose of making a profit is what converts money into capital. While money by itself only represents a means of exchange if it is not invested in the generation of more value.

In the economy, capital along with land and labor are the factors of production. capital it is made up of the tools and resources invested to produce more. The earth it provides the locus of economic activity and is where raw materials are extracted from. The job It is expressed in the effort and time of the people dedicated to production.

Financial capital

Financial capital is money put into entities such as banks, mutual funds, or the stock market. That money comes from the savings of a person or an investment company that decides to allocate resources to companies in order to obtain profits.

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This capital increases when the lenders receive payments, profits or dividends from the companies that have obtained income with the use of the invested money. So financial or business capital can be understood as money used to produce more services or consumer goods.

As not all businesses are successful, sometimes the balance of economic operations is negative. In such cases, it is recognized losses. When the result is positive, it indicates that there is Capital gains.

The difference between financial capital and physical capital

Financial capital consists of cash or other instruments that can be converted into money quickly, such as stocks or tradable securities. While physical capital is made up of the goods that contribute to the production process of a company. Among these we find furniture, industrial facilities, computers, etc.

Sources of financial capital

The credit

It refers to funds received on loan from sources such as banks, private investors, or even government institutions. The credits allow entrepreneurs to have access to money to open or improve businesses.

Credits are considered a liability or obligation in companies, since they must be paid to lenders and normally carry an interest charge.

the share capital

Equity capital refers to the assets that investors contribute to a company. Thus, through the acquisition of shares or contributions made, investors become co-owner partners of a company. Such shareholders share both the percentage split of their profits and the risks of loss.

Large companies trade their shares publicly on the stock market. This means that any citizen or entity can buy shares of these companies as long as they meet certain legal requirements.

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Other examples of capital

Stockholders’ equity

This is the net worth that a company has after adding the value of all its assets and subtracting all its liabilities.

In other words, it is the money that would be left if a company sold all its possessions: inventory of products, as well as buildings, furniture, etc., and that resulting amount was subtracted from the payment of all its debts. This value must appear on the balance sheet and in the statements of assets.

Human capital

This concept encompasses the professional skills possessed by employees and workers. Human capital provides added value to companies thanks to the increase in productivity created by the knowledge and experience of qualified people.

See also human capital.

physical capital

Physical capital counts the tangible, man-made goods used to facilitate production processes. These can include factories, machinery, vehicles or any other element that facilitates the production of goods and services that will enter the markets.

speculative capital

Speculative capital is considered to be the funds that an investor allocates to high-risk businesses. Speculation consists of the purchase of assets or financial instruments with the expectation that their price will rise in the short term. Of course, these speculative investments can lead to big profits or big losses.

bank capital

This is the net worth of a bank after accounting for the difference between its assets and its liabilities. A bank’s assets include money in its possession, securities, insurance, and interest on loans receivable. Among its liabilities are debts and losses due to interest on credits not collected.

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Bank capital is understood as the bank’s store of value. This must be solid to protect creditors in the event of an eventual liquidation of the entity.

Bibliography

Lange, Oskar (1979) Political economy. Fund of Economic Culture. Mexico.

Salazar, José & Ponce, Mario (2019) Basic accounting manual: notes and exercises proposed and resolved. INACAP. Chili.

Say-Jean Baptiste (1880) A Treatise on Politica Economy, or the Production, Distribution and Consumption of Wealth. Philadelphia. Claxton, Remsen & Haffelfinger. (Facsimile Edition).

See also:

  • Capitalism.
  • 10 characteristics of capitalism.