Capital goods

Capital goods are fixed assets which are used in the productive process in order to produce a finished ‘consumer’ good. Capital goods are not bought for their own utility; they are bought in order to be used in the productive process.

capital-consumer-goodsExamples of Capital Goods

  • Factories
  • Offices
  • Machines
  • Printing press
  • Combine harvester
  • Assembly line

In addition to capital goods bought by a firm, capital goods can also include more public-oriented capital goods

  • Infrastructure – roads, trains, telephone lines are all used in the productive process. However, investment in these capital goods often comes from the government because they have elements of being public goods.

The main groups of capital goods are Property, Plant and equipment. (PP and E)

Capital goods in the service sector

  • Coffee machine
  • Fans
  • Shop tills
  • Computerised stock systems

Related terms

  • Capital investment – purchase of fixed capital assets, e.g. a firm buying new printing machine, new coffee maker.
  • Capital expenditure – the cost of purchasing new capital goods.

Possible confusion

In economics we can also talk about capital meaning ‘assets and wealth’ for example, international capital flows – refers to the transfer of money from country to buy assets in another.

The difference between capital and consumer goods

Consumer goods are items ready for sale and bought for final consumption. For example, bread, pastries, drinks. With consumer goods, they are not used to make a further type of good.

Goods which can be both capital goods and consumer goods

A household may a lawnmower to cut their grass. In this case, it is a consumer good.

However, if a gardening firm, purchases a lawnmower, it is considered a capital good. In this case, the gardening firm is using the lawnmower to produce a good/service of lawnmowing services.

The importance of capital goods

Capital goods are important for increasing the long-term productive capacity of the economy. More capital goods reduce consumption in the short-term, but can lead to higher living standards in the economy. Therefore, economies often face a trade-off between consumer goods and capital goods.

ppf-consumer-capital-goods

The opportunity cost of moving from point A to point B, is that consumer goods falls from 150 to 70. But, in long-term, PPF can shift to the right.

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