What are capital goods? Definition and meaning

Capital goods are products and things that are used in the production of goods and provision of services. They are durable goods, i.e. ones that last a long time, or do not wear out quickly.

The term should not be confused with the financial term ‘capital’, which refers to wealth or money.

Capital goods are basically fixed assets such as machinery, equipment, buildings, vehicles, computers, etc. However, they may also include infrastructure components, such as railway lines, roads and bridges.

The term is commonly used in a macroeconomic context (the whole economy) when talking about capital formation and the creation of productive capacity.

Capital GoodsJohn is trying to decide whether to spend his money on a capital good (lawn mower), which would increase his productivity, or a consumer good (video game system).

In order to produce goods and provide services, three things are needed: 1. Capital goods. 2. Land. 3. Labor. The three components are collectively known as the primary factors of production.

Difference between capital goods and consumer goods

Capital goods and consumer goods are classified according to how they are used.

A consumer good is a product used by consumers that has no future productive use. For example, a chocolate bar is a consumer good because it is bought by a shopper (consumer), and then eaten. It is not used to produce anything else.

A capital good is any product or thing deployed to produce goods or increase production. The most common capital goods are referred to as PP&E (property, plant and equipment).

Capital goods typically require a considerable investment on behalf of the producer. The purchase of capital goods is referred to in accountancy as a capital expense.

Cambridge Dictionaries Online says capital goods are:

“The buildings, machines, and equipment that are used to produce products or provide services.”

According to the Federal Reserve Bank of St. Louis, nearly four-fifths of capital goods production globally is concentrated in just 10 countries. Emerging economies and low-income nations import the vast majority of their capital goods.

Video – Capital goods and productivity

In this video, Chris, who looks after people’s lawns, quickly learns that by investing in a capital good (a weed eater) his productivity increases and he is able to deal with two extra lawns each week.