CAPITAL

Capital is an underlying component of an economy. As a collective body, capital includes resources such as cash, equipment, investments, and property that are used to operate a business. Capital can be categorized in several ways. For instance, it can be either fixed or circulating. Fixed capital is durable in nature and is expected to have a long life. Plants (buildings/factories) and equipment are examples of fixed capital. Circulating capital refers to nonrenewable resources, such as raw material or oil. Capital can also be liquid, or readily able to be converted to cash. For instance finished goods that are in inventory are liquid capital. Frozen capital consists of resources that cannot be easily converted to cash, as is the case with buildings or machinery.

Capital assets, or fixed assets, can be sold. Capital gains or losses represent the profit or loss from the sale of capital assets. The gain or loss is the difference between the selling price and the original cost of the asset. Capitalization is the conversion of something into financial capital. As an example, capitalization occurs when a company sells stocks to gain cash. Over the years the term capital has changed in its meaning. To economists in the nineteenth century capital referred to the business income that resulted from industry. Income that was generated from natural resources such as oil deposits was called rent. Economists no longer recognize this distinction and use capital to refer to all resources that can produce goods or services, and hence create future income for a business.