Physical Capital: Definition and Effects on Productivity

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  • 0:05 What Is Physical Capital?
  • 1:25 Real-World Examples
  • 3:53 The Importance of…
  • 5:03 Lesson Summary
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Lesson Transcript
Instructor: Jon Nash

Jon has taught Economics and Finance and has an MBA in Finance

This lesson explains what physical capital is and why it's important to an economy. Using real-world examples, you'll see how it relates to the process of producing goods and services, which is a major foundation of economic growth.

What Is Physical Capital?

In any economy, the production of goods and services happens every day. Physical capital is part of the production process, what economists call a factor of production. It includes things like buildings, machinery, equipment and computers. Let's take a closer look at physical capital: what it is, what it isn't and see it in action within our economy.

First, let's take a look at what it is and what it isn't. Physical capital isn't the land or the raw materials that are used and turned into goods and services; those are natural resources. It isn't the people with knowledge or education that help produce things; they're called human capital. Physical capital is the machinery, buildings and computers that helped turn the raw materials into finished products or services. It is all of the equipment and all of the other physical things that a business owner or company invests money into when they want to produce something.

Real-World Examples

To learn more about physical capital, I want you to join me as we take a tour of the Fantastic brand corn chips factory.

Standing outside the factory building, we can see two men unloading bags of corn, salt and a secret flavor recipe from a delivery truck. These raw materials are then carried inside the building, where they are placed in various types of machines. The corn, which is the main ingredient, is placed in a very large pot that cooks it. Once cooked, workers place it into a machine that grinds it down until it becomes fine corn flour. After another machine adds salt, cooking oil and other flavorings to it, this corn flour enters a shaping machine that turns it into small triangles, and then it moves along a conveyor belt towards a large oven.

Sam, who operates this machinery with a computer that monitors the oven's temperature, ensures that every batch of raw chips gets cooked properly. Once this batch is placed in the oven, cooled and placed in bags, this production process has turned it into a crispy, crunchy, corny creation that consumers constantly crave. As a matter of fact, when they eat it, they often say it is 'quite fantastic!'

Tractors are physical capital used in agriculture.
Physical-Capital-Tractors

As we just saw in this tour of the corn chips factory, physical capital was used to make the chips, but none of it was included in a bag of Fantastic corn chips. Physical capital is used not just to produce chips, but in the production process across the entire economy to produce other goods and services. In farming, a tractor used in the process of producing crops is an example of physical capital. In the clothing industry, it's a sewing machine. In the auto industry, it's an assembly line that produces cars. Whatever it is that's being produced, these goods and services are then sold at a price that buyers and sellers both agree on in a free market.

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