What is Capital? Meaning, Features and Types of Capital

What is Capital? Meaning

Different subjects like Book-keeping, organization of commerce (O.C) and secretarial practice (S.P) in commerce, economics, etc., indicate different meaning of the term Capital.

In book-keeping, capital means amount invested by businessman in the business.

In commerce subjects like O.C and S.P, capital means finance or company's capital.

But, in economics, capital is that part of wealth which is used for production.

But here consider meaning of term capital from economic point of view.

Relations of Capital

The word Capital is related with the following three terms, viz.,

1. Wealth,
2. Money, and
3. Income.

The relation of capital with wealth, money and income is explained below:-

1. Relation with Wealth:-

Capital is that part of wealth which is used for production. So, wealth is a broad concept and capital is a narrowed concept.

Relation of Capital and Wealth is explained with the help of following picture.

If a commodity is having features like scarcity, utility, externality and transferability, it becomes wealth. A motor car has all above features, so it is a wealth. (As per picture 'A' in above photo). When wealth is used in production process, it becomes capital. If that car is used for taxi (cab) business, it becomes capital. (As per picture 'B' in above photo). Therefore, any commodity as a wealth becomes the capital if it is used for production.

Thus, all capital is wealth but all wealth is not capital.

2. Relation with Money:-

The relation between Capital and Money is shown in the following picture.

Normally, capital means investment of money in business. But in economics money becomes capital only when it is used to purchase real capital goods like plant, machinery, etc. When money is used to purchase capital goods, it becomes Money Capital. Please see the picture given above.

But money in the hands of consumers to buy consumer goods or money hoarded doesn't constitute capital. Money by itself is not a factor of production, but when it acquires stock of real capital goods, it becomes a factor of production. For production we need real capital and money capital but money capital acquires real capital.

3. Relation with Income:-

Capital generates income. So, capital is a source and income is a result. E.g. refrigerator is a capital for a ice-cream parlour owner. But, profits which he gets out of his business is his income.

So, Capital is a FUND concept and Income is a FLOW concept.

Features of Capital

The characteristics or features of capital are:-

1. Man-made Factor : Capital is not a gift of nature. So it is not a primary or natural factor, it is made by man in capital goods industry. It is secondary as well as an artificial factor of production.
2. Productive Factor : Capital helps in increasing level of productivity and speed of production.
3. Elastic Supply : Supply of capital depends upon capital formation process. Capital formation depends upon savings and investment. By accelerating capital formation, capital supply can be increased. But it is a long term process.
4. Durable : Capital is not perishable like labour. It has a long life subject to periodical depreciation.
5. Easy Mobility : Movement of capital from one place to another is easily possible.
6. Is a Wealth : Since capital has all features of wealth viz. utility, scarcity, transferability and externality, capital is a wealth but wealth doesn't necessarily become capital.
7. Derived demand : As a factor of production, capital has a derived demand to produce finished goods which have a direct demand. e.g. demand for raw cotton is derived from demand for cotton cloth.
8. Round about production : Capital goods doesn't satisfy our wants directly. But resources should be diverted towards production of capital goods first. And thereafter such produced mean can be used to produce consumer goods having direct demand.
9. Social Cost : Resources have alternative uses. Either they can be put to production of capital goods or consumer goods. When resources are used for producing capital goods, it means society has sacrificed enjoyment of consumer goods. This is called social cost.

Types of Capital

The forms, classification or types of capital are:-

1. Fixed capital : It refers to durable capital goods which are used in production again and again till they wear out. Machinery, tools, means of transport, factory building, etc are fixed capital. Fixed capital does not mean fixed in location. Since the money invested in such capital goods is fixed for a long period, it is called Fixed Capital.
2. Working capital : Working capital or variable capital is referred to the single use produced goods like raw materials. They are used directly and only once in production. They get converted into finished goods. Money spend on them is fully recovered when goods made out of them are sold in the market.
3. Circulating capital : It is referred to the money capital used in purchasing raw materials. Usually the term working capital and circulating capital are used synonymously.
4. Sunk capital : Capital goods which have only a specific use in producing a particular commodity are called Sunk capital. E.g. A textile weaving machine can be used only in textile mill. It cannot be used elsewhere. It is sunk capital.
5. Floating capital : Capital goods which are capable of having some alternative uses are called floating capital. For e.g. electricity, fuel, transport vehicles, etc are the floating capital which can be used anywhere.
6. Money capital : Money capital means the money funds available with the enterprise for purchasing various types of capital goods, raw material or for construction of factory building, etc. it is also called liquid capital. At the beginning the money capital is required for two purposes one for acquiring fixed assets i.e. fixed capital goods and another for purchasing raw materials, payment of wages and meeting certain current expenses i.e. working capital.
7. Real capital : On the other hand, real capital is referred to the capital goods other than money such as machinery, factory buildings, semi-finished goods, raw materials, transport equipments, etc.
8. Private capital : All the physical assets (other than land), as well as investments, which bring income to an individual are called private capital.
9. Social capital : All the assets owned by a community as a whole in the form of non-commercial assets are called social capital e.g. roads, public parks, hospitals, etc.
10. National capital : Capital owned by the whole nation is called national capital. It comprises private as well as public capital. National capital is that part of national wealth which is employed in the reproduction of additional wealth.
11. International capital : Assets owned by international organizations like UN, WTO, World Bank, etc., constitutes an International Capital.