6.1       CAPITAL

Capital refers to all man-made resources/ aids which are used in the production of other goods and services. It includes the stock of goods existing in a given period of time (and it is created in the process called investment).

6.2       Forms of capital

  • Real capital

          This refers to the stock of physical assets that have money value and are capable of producing other goods and            services. Examples are: machinery, office equipment, buildings.

  • Money/nominal capital

`           This is capital in form of currency notes. It is usually a form of payment but it is not directly productive.

  • Private /individual capital

         Refers to capital owned by an individual and yields income to the individual owner or a business unit such as                 investment in business, shares in companies and bank deposits.

  • Public/social capital

         Refers to physical assets owned by the government on behalf of all people/individuals in an economy. Examples           are: roads, public parks, hospitals, railway among others.

  • Fixed capital

         Refers to capital in form of assets that are capable of being used for a long period of time such as machinery,                 and factory buildings. It is capital in form of durable or permanent assets.

  • Floating capital

         Refers to capital that can be used for a number of purposes and in a variety of ways. Examples are: money, raw               materials.

  • Sunk/specialized capital

         Refers to capital that cannot easily be adapted to an alternative use.  Or It is specific capital which cannot be                   used for any other purpose apart from what it has been made for. Examples are: a railway locomotive, ice cream             plant.

  • Circulating/variable capital / working capital

         This is capital in form of raw materials, other inputs of the firm; money used to pay workers, pay taxes and other           expenses of the firm. (These are things used in production only once and are exhausted in a single operation).

Note: Human capital. Refers to capital in form of human beings who have acquired training and education, and have skills and knowledge.

6.3       Characteristics of capital

  • It is man-made resources/aids to production
  • Can be accumulated over time
  • Has money value
  • Subject to depreciation/ wear and tear (losing value)
  • Capital can become outdated or obsolete (no longer useful or not functioning any more)
  • The reward to capital as a factor of production is interest
  • Capital is either specific or unspecific

6.4       Role of capital in an economy

  • Facilitating optimum resource utilization/ increases resource utilization. Due to capital investment idle resources are put to use and this minimizes resource wastage.
  • Encouraging technological development and transfer. Capital is used to carry out research hence improving the techniques of production, and enables a country to transfer modern technology from other countries.
  • Facilitation of research. Capital is used to carry out research on new production methods, new products, and market survey for products-which in turn increases production.
  • Improving the quality of output. This is because machines are capable of doing better work and hence improving the standard of living.
  • Simplifying and quickening the production process leading to increased output. This makes production and supply of goods more reliable on the market.
  • Facilitation of industrialization process in the economy. Capital enables building of more industries and hence more goods and services are produced, hence increasing national income.
  • Enables the country to import from other countries technical knowledge in form of experts and other forms of locally scarce labour. This in turn promotes domestic production, which reduces dependence.
  • Increases efficiency and productivity of other factors of production. For example, land is better utilized and this leads to production of more goods and services.
  • Promotes of specialization and division of labour in the production process. People concentrate at particular stages and hence advantages enjoyed such as increased output and exchange with other regions.
  • Facilitates exchange and therefore enhancing commercial production. People produce more output and sale to others, which in turn promotes transformation of the economy from subsistence to monetary economy.
  • Facilitates/ promotes infrastructural development. For example, develops roads, railways, banks, power supply, hospitals –which in turn promote various productive activities in the economy.
  • Facilitates further capital formation through borrowing and lending. This is because fixed assets like machines, premises, buildings are used as collateral security to acquire loans used for further investment.

6.5       Factors influencing the supply of capital

  • The level of interest rate on loans. A high interest rate on loans limits the supply of capital while a low interest rate on loans leads to more capital supply.
  • The demand for goods and services produced by capital. High demand for goods and services results into more supply of capital while low demand for goods and services leads to low supply of capital.
  • Government monetary and fiscal policies. Restrictive government policy such as through high bank rate leads low supply of capital while expansionary monetary policy of government increases the supply of capital.
  • Level of capital inflow and outflow. High capital inflow and low capital outflow increases the supply of capital. However high capital outflow and low capital inflow reduces the supply of capital.
  • The marginal efficiency of capital.