Capital good
A capital good is a durable good (one that does not quickly wear out) that is used in the production of goods or services. Capital goods are one of the three types of producer goods, the other two being land and labour, which are also known collectively as primary factors of production. This classification originated during the classical economics period and has remained the dominant method for classification.
A society acquires capital goods by saving wealth that can be invested in the means of production. In terms of economics, capital goods are tangible property. People use them to produce other goods or services within a certain period. Machinery, tools, buildings, computers, or other kinds of equipment that are involved in production of other things for sale, are capital goods. The owners of the capital good can be individuals, households, corporations or governments. Any material used to produce capital goods is also considered a capital good.
Many definitions and descriptions of capital goods production have been proposed in the literature. Capital goods are generally considered one-of-a-kind, capital intensive products that consist of many components. They are often used as manufacturing systems or services themselves.
Examples include automated storage and retrieval systems, automatic test equipment, battleships, baggage handling systems, data centers, oil rigs, roller coaster equipment, semiconductor fabrication plants, and wind turbines. Their production is often organized in projects, with several parties cooperating in networks (Hicks et al. 2000; Hicks and McGovern 2009; Hobday 1998). A capital good lifecycle typically consists of tendering, engineering and procurement, manufacturing, commissioning, maintenance and (sometimes) decommissioning [1]. [2]
Differences from consumer goods
People buy capital goods to use capital goods as static resources to make other goods, but buy consumer goods to consume.
For example, an automobile is a consumer good when purchased as a private car. Dump trucks used in manufacturing or construction are production goods, because companies use them to build things like roads, dams, buildings, and bridges. In the same way, a chocolate bar is a consumer good, but the machines that produce the candy are production goods. Some capital goods can be used in both production of consumer goods or production goods, such as machinery for production of dump trucks. Consumption is the logical result of all economic activity, but the level of future consumption depends on the future capital stock, and this in turn depends on the current level of production in the capital-goods sector. Hence if there is a desire to increase the consumption, the output of the capital goods should be maximized. [3]
Importance
Capital goods, often called complex products and systems (CoPS) (Gann and Salter 2000; Hobday 2000), play an important role in today’s economy (Acha et al. 2004). 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.
Investment required
The acquisition of machinery and other expensive equipment often represents a significant investment for a company. When a business is struggling, it often puts off such purchases as long as possible, since it does not make sense to spend money on equipment if the company is not 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. 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.[2]
In international trade
In the theory of the international trade the causes and nature of trade of capital goods receive little attention. Trade in capital goods is a crucial part of the dynamic relationship between international trade and development. The production and trade of capital goods as well as consumer goods must be introduced to trade models, and the entire analysis integrated with domestic capital accumulation theory.