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Physical Capital - Definition & Advantages of Physical Capital | What is Physical Capital?

Physical Capital is one of the essential factors of production apart from land and labour. Physical capital is essential for economic growth and development in the field of economics. It refers to tangible assets and infrastructure that businesses and individuals use to create goods and services. Examples of physical capital include machinery, factories, equipment, and transportation networks, which are the foundation of modern economies. Manufacturing companies invest or buy physical capital to produce various goods and services.


What Is Physical Capital?

Physical capital includes a variety of assets used in production, which enhance productivity and drive economic growth. These assets consist of machinery, tools, buildings, infrastructure, vehicles, and technology. They play a crucial role in converting raw materials into finished products, improving efficiency, and expanding the capacity to produce goods and services.

There are two types of physical Capital:

  • Fixed Capital like equipment and tools

  • Working Capital like inventories 

Physical capital differs from human and financial capital in its role in generating output. Financial capital, such as available cash, is used to acquire physical capital like vehicles and raw materials. While financial capital indirectly supports the manufacturing process, physical capital directly contributes to it.

On the other hand, human capital encompasses the skills and knowledge possessed by individuals. It plays a vital role in enhancing productivity. For instance, operating a physical capital machine requires labor skills, which are a part of human capital.


Advantages of Physical Capital

Physical capital offers numerous advantages. Firstly, it contributes to the growth of the economy by increasing productivity and generating more output. It plays a direct role in the manufacturing of products. For instance, in construction sites, cement is utilized by workers to construct buildings, while vehicles facilitate the transportation of raw materials between locations.

The presence of physical capital within a company determines its production capacity. Sufficient raw materials and machinery enable higher output levels. Furthermore, the use of high-quality physical capital and advanced techniques in machines can further boost production.

Another benefit of physical capital is its potential for long-term use when properly maintained. It can be retained and utilized over extended periods.


How does physical capital impact economic growth?

The impact of physical capital on economic growth is significant. Investing in physical capital contributes to the growth of the economy and is a key component of the gross domestic product (GDP). It has both short-term and long-term effects.

When companies invest in capital goods, it leads to improved productivity. Employees can achieve better results with the aid of new equipment. For example, advanced machinery in a chocolate factory can produce a larger quantity of chocolates than would be possible otherwise.



In conclusion, physical capital is a vital factor in the production process, enabling the transformation of raw materials into finished products. Investing in physical capital is essential for companies aiming to develop products and ensures timely completion of the production process, resulting in excellent output