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Physical Capital

Definition

Physical capital, also known as "capital goods," refers to the tangible assets used in production, such as machinery, equipment, buildings, and infrastructure. It is one of the factors of production alongside labor and natural resources.

Analogy

Think of physical capital as the tools and equipment in a bakery that help produce delicious pastries. Just like how having better ovens or mixers can improve the efficiency and quality of baked goods, physical capital enhances productivity in various industries.

Related terms

Investment: Investment refers to the purchase or creation of physical capital assets by businesses or individuals with the expectation of generating future income or returns.

Depreciation: Depreciation represents the decrease in value over time for physical capital due to wear and tear, obsolescence, or other factors.

Capital Intensive Production: Capital-intensive production refers to an industry or process that relies heavily on physical capital relative to labor.