CapitalContd Capital

<strong>Capital</strong>Contd Capital

Capital(cont�d)The capital stock intended for use in further production may be divided into two kinds, fixed and working (or circulating). Fixed capital consists of instruments of all kinds, including buildings, improvements to land such as drainage works and harbour installa-tions, and machinery and equipment. Working capital consists of goods in the process of being prepared for consumption: raw materials, semi-finished goods and finished goods in the hands of manufacturers, wholesalers and retailers. This distinction is made for two main reasons. First, the income yielded by fixed capital may for long periods depart from a current market return on replacement cost because the capital is usually specialized and takes time to increase or decrease in amount (its supply is inelastic). In the meantime its income depends upon the demand for its product and the quantity of fixed capital in existence. Working capital can be quickly adjusted if its yield departs from the market return on replacement. Secondly industries supplying fixed capital goods are subject to large fluctuations in demand because durability allows discretion in the timing of replacements, and additions to fixed capital are not usually made at a regular rate.

The stock of goods making up a nation's capital might in principle be listed in a vast stock-taking. Valuing this capital is more difficult.

The value of a capital good depends upon the net receipts which will be earned over its life discounted back to the date of valuation. Future earnings can only be estimated, and the life of an asset is not a physical but an economic quantity depending upon obsolescence (due to unforeseeable change in fashion, etc.) as well as physical breakdown.

So much for capital from the viewpoint of the whole community, in which individuals' claims upon one another cancel out. To an individual stocks and shares, his bank deposit and other titles to property all form part of personal capital; but not to the community. These pieces of paper are merely evidence of indebtedness; whatever A is owed by B, B owes to A, and for the community as a whole (apart from debt owed to it by people outside it) such debts cancel out. The concept of personal capital as applied to an individual, that is, paper claims as well as real assets, is important, however, because decisions made by individuals about the form in which they will hold their personal wealth affect the pattern of asset prices and interest rates in the economy at a given time.

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