Key Takeaways
- Capital goods are man-made, durable items that businesses use to produce goods and services.
- Tools, machinery, buildings, vehicles, computers, and construction equipment are types of capital goods.
- Capital goods are one of the four leading economic factors.
- An increase in orders and shipments of capital goods is a sign that businesses expect more demand and that the economy will grow.
How Do Capital Goods Work?
Any man-made durable item used in business is a capital good. Capital goods, unlike consumer goods, are used to produce other goods.
Capital goods don't go straight into the manufacturing of other goods. Those goods are called "raw materials." Instead, capital goods are part of the process of making other goods or providing services. Examples of capital goods include buildings, furniture, and machines like construction vehicles. All of these help drive economic work.
Innovations in capital goods often drive business growth and can create new types of manufacturing jobs. As new capital goods are developed, businesses need workers to learn new skills to operate them. These skilled workers can be in high demand.
In the United States, the monthly durable goods orders reportmeasures capital goods production.It reports capital goods shipments, new orders, and inventory. It is one of the most important leading economic indicators.
Core capital goods, which exclude aircraft and defense equipment, are a leading economic indicator, telling how well U.S. businesses are doing. When businesses order more capital goods, it's a sign that they expect production to go up, which shows that the economy and GDP may grow.
TheU.S. Census Bureau provides the durable goods report. Itsurveyscompanies that ship more than $500 million worth of goods per year. These companies may be part of large corporations and includesingle-unit manufacturers in 92 industry categories.
Examples of Capital Goods
Capital goods are man-made, durable items used by businesses to produce goods and services. They include tools, buildings, vehicles, machinery, and equipment.
Note
In accounting, capital goods are treated as fixed assets. They’re also known as “plant, property, and equipment.”
Capital goods are one of the four factors of production. This means that businesses cannot run without them. The other three are:
- Natural resources, such as land, oil, and water
- Labor, such as workers
- Entrepreneurship, which is the drive to create new companies
Notable Happenings
The United States has been a technological innovator in creating capital goods, from the cotton gin to drones. Since 2000,Silicon Valleyhas become the U.S. innovation center.
Note
America's success as a provider of capital goods has created a comparative advantage for the country, which has helped it to remain the world's largest economy, with China becoming a close second and predicted to overtake the U.S. in this regard in years to come.
The history of manufacturing contains many examples of how new capital goods also create economic advantages. These inventions drove the creation of new industries, allowing businesses and economies to grow around the world.
- In 1789, Samuel Slater improved textile manufacturing, and Eli Whitney invented the cotton gin four years later. These achievements made the United States a leader in clothing manufacturing.
- The invention of Morse Code and the telegraph in 1849, followed by Alexander Graham Bell's telephone in 1877, made communication faster.
- Thomas Edison invented a safe incandescent lamp in 1879 allowing people to work longer and making urban living easier.
- Steamboats led to steam locomotives, which paved the way for coast-to-coast commerce, growth, and travel.
- In 1902, air conditioning began to allow more people to settle in hot areas and made it easier to work through the summer.
- In 1903, the Wright Brothers invented the airplane, leading to faster travel.
- In 1913, Ford's assembly line allowed mass production of affordable cars. That increased demand for expanded travel and led to the Federal Aid Highway Act of 1956, increasing shipping and creating a higher suburban standard of living.
- In 1926, Robert Goddard invented the liquid propulsion rocket, which gave the United States an advantage in defense.
Types of Capital Goods
There are many types of goods that affect a country's economy.
Core Capital Goods
Core capital goods are anotherleading indicatorof economic growth. They don't include defense equipment or aircraft. These are large orders that don't appear on a regular schedule. Core capital goods orders tell you how much businesses use on a daily basis.
The Census Bureau measures both orders and shipments. The latter shows up in that quarter'sgross domestic product (GDP) estimate. Orders don't show up until later when the goods are manufactured and shipped.
When orders for core capital goods rise, it's a sign that the nation's GDP will likely increase in the coming months.
Capital Goods vs. Consumer Goods
Unlike capital goods,consumer goods are not used to create other products.
Note
Both capital goods and consumer goods can be durable goods.
Like capital goods,durable consumer goodsare heavy-duty and long-lasting. They’re the appliances bought by households, such as cars, refrigerators, and dryers. Many items can be both capital goods and consumer goods. Which type they are depends on how the items are used.
Shipments of consumer goods are also included inU.S. GDP. As a result,consumer spending drives almost 70% of GDP.
Computers are capital goods if they are used by a business, but not if they are used by a family. The same goes for ovens, refrigerators, and dishwashers. If they are for commercial use only, they are capital goods.
Commercial aircraft are capital goods, because they are used by airlines to provide a service: transportation. An airplane used by private pilots for weekend hobbies is a consumer good. That same type of plane used for a sightseeing business is a capital good.
Another example is trucks and cars. Businesses use them as capital goods, but a family would use them as consumer goods. Buildings are capital goods if they're turned into a factory, office, or warehouse. They're consumer goods if they are used for housing.
Frequently Asked Questions (FAQs)
What is the difference between capital goods and consumer goods?
Capital goods are used to make consumer goods. Tools, machinery, buildings, vehicles, and computers are examples of capital goods. Some items can be both capital goods and consumer goods depending on how they are used.
What is the purpose of investing in capital goods?
When businesses or people invest in capital goods, it allows businesses to expand. Investing in capital goods could look like purchasing a capital good for your business or buying the stock of a company that builds capital goods.
