What is Capital: A Look at a Key Economic Concept

Understanding capital: definition, meaning, and explanation of a key economic concept

What is Capital?

Capital, in economic terms, refers to the financial resources or assets that businesses use to produce goods and services and generate profit. It is one of the key factors of production, alongside labor and land. Capital can take various forms, including physical assets like machinery and buildings, or financial assets like money and stocks.

Types of Capital

Capital can be broadly categorized into two types: Physical Capital and Financial Capital.

Physical Capital

Physical capital refers to tangible assets that a company uses in its production process. These assets can include machinery, buildings, vehicles, and equipment. Physical capital is essential for businesses as it increases their productive capacity and efficiency.

Financial Capital

Financial capital, on the other hand, refers to the funds a company has at its disposal. This can include cash, stocks, bonds, and other financial assets. Financial capital is used to purchase physical capital and pay for labor and other operational costs.

Role of Capital in Economics

Capital plays a crucial role in the economic development of a country. It is used to invest in new businesses and expand existing ones, leading to job creation and economic growth.

Investment and Economic Growth

When businesses invest in capital, they increase their capacity to produce goods and services. This leads to an increase in output, which contributes to economic growth.

Job Creation

Investment in capital also leads to job creation. As businesses expand and increase their production, they require more labor, leading to an increase in employment.

How Capital Works

Capital works by providing businesses with the resources they need to operate and grow. Businesses acquire capital through various means, including borrowing, issuing shares, and reinvesting profits.

Acquisition of Capital

Businesses can acquire capital through borrowing from banks or other financial institutions. They can also raise capital by issuing shares to investors.

Use of Capital

Once acquired, businesses use capital to purchase assets, pay for labor, and cover other operational costs. Any remaining capital can be reinvested back into the business to further increase its productive capacity.


In summary, capital is a key economic concept that refers to the resources businesses use to produce goods and services. It plays a crucial role in economic development by facilitating investment, economic growth, and job creation. Understanding the concept of capital is essential for anyone interested in economics or finance.