In economics, capital goods are tangible objects that are used in the production of other goods or commodities or during the providing of services. They can include things such as buildings, machinery, tools, computers and any other equipment that is used to make or do something else, which can then be sold to another party. The means of production might be owned by individuals, businesses, organizations or governments. This term also refers to any material used or consumed while other goods are being produced or services are being provided.
Investment Required
In most cases, capital goods require a substantial investment on behalf of the producer, and their purchase is usually referred to as a capital expense. These goods are important to businesses because they use these items to make functional goods for customers or to provide consumers with valuable services. As a result, they are sometimes referred to as producers' goods, production goods or means of production.
Capital Goods vs. Capital
The economic term "capital goods" should not be confused with the financial term "capital," which simply refers to money or wealth. Production goods generally are man-made and do not include natural resources such as land or minerals. They also do not include "human capital" — the labor, intellectual skills and physical skills provided by people in the production of other goods. So, for example, a company that provides limousine services would include its fleet of limousines and its facilities among its capital goods, but its drivers would not be included.
Different from Consumer Goods
A distinction also should be made between capital and consumer goods, which are purchased for purposes other than to be used in the production of other things. For example, cars generally are considered consumer goods because they are often bought by individuals for personal use. Dump trucks, however, might be considered production goods if they are used by construction and manufacturing companies to assist in making products such as roads, bridges, dams or buildings. Similarly, a chocolate candy bar is a consumer good, but the machines that are used to produce the candy would be considered production goods.
Capital goods typically are used to produce consumer goods, but they also might be used to manufacture other production goods. A company that builds dump trucks, for example, requires equipment and facilities to create that vehicle.
The Importance of Capital Goods
Aside from allowing a business to create goods or provide services for consumers, capital goods are important in other ways. In an industry where production equipment and materials are quite expensive, they can be a high barrier to entry for new companies. If a new business cannot afford to purchase the machines it needs to create a product, for example, it may not be able to compete as effectively in the market. Such a company might turn to another business to supply its products, but this can be expensive as well. This means that, in industries where the means of production represent a large amount of a business's start up costs, the number of companies competing in the market is often relatively small.
The acquisition of machinery and other expensive equipment often represents a significant investment for a company, so spending on such assets is often watched closely by economists. When a business is struggling, it will often put off such purchases as long as possible, since it doesn't make sense to spend money on equipment if the company isn't around to use it. Capital spending can be a sign that a manufacturer expects growth or at least a steady demand for its products, a potentially positive economic sign.
Tax Implications
Money spent to buy or improve equipment, factories, and other similar assets is called a capital expenditure. Under standard accounting rules, because the asset won't be useful for just the year in which it was purchased, it must be depreciated over time. A fixed percentage of the value of the asset can be deducted from the business's taxes each year for a specific number of years, in many cases. Laws on depreciation vary by country, and can also vary within a country, depending on the asset and the type of business.
