Forex Trading

Difference between Physical Capital and Human Capital

In economics and businesses, the two main capitals are human capital and physical capital. Physical capital refers to factors of production that foster the manufacturing process of raw materials into finished products. Physical capital examples are machinery, computers, tools, and equipment among many others. If seen from the economic development point of view, human resources are important.

Financial (Economic) Capital

On the other hand, specific human capital is the education and training which have beneficial values only to the organisation. Gary Becker categorised human capital into two sections- general human capital and specific human capital. General human capital is the qualities and training that have beneficial values to the individual at any organisation. While physical capital is necessary for a company’s operations, it can be difficult to value and it depreciates over time unless upgraded or enhanced. Firstly, capital in a business is supposed to guarantee the sustenance of liquidity.

In summary, while physical capital is essential for many businesses, it also has limitations, such as high initial costs, depreciation, maintenance requirements, inflexibility, and environmental impact. Businesses must carefully consider these factors and weigh the pros and cons before making significant investments in physical capital. After acquiring ample knowledge and calculating the outcome, an investment in physical capital is made. An owner or entrepreneur calculates the expected return from the investments that he/she is making and based on that calculation selects the option, which offers a relatively higher return.

As such, an item of fixed capital has long-term difference between physical capital and human capital value, but that value can change over time. It can be reduced due to aging and it is normally not shown on the financial statements. Human and physical capital are the lifeblood of companies and are responsible for helping them to generate profits.

1. Human capital refers to a set of individual’s skills, talents, abilities, and knowledge brought into the organization.
2. In simpler words, it portrays the cumulative value of a company’s intellectual capital.
3. Individuals possessing skills, knowledge, experience, and abilities contribute to economic productivity and are referred to as human capital.
4. Social capital is an even more intangible asset, referring to the relationships people have with each other, and the desire they have to do things for and with others within their social networks.

Combination of physical and human capital for maximum returns

While human capital represents the knowledge, skills, and abilities of individuals, physical capital encompasses tangible assets used in production processes. Both forms of capital have distinct attributes and contributions, but they are interdependent and complementary. The combination of skilled individuals and advanced technology drives economic growth, innovation, and competitiveness. To ensure sustainable development, it is crucial for societies to invest in both human capital and physical capital, fostering education, training, infrastructure development, and overall well-being. On the other hand, physical capital refers to the tangible assets and resources used in the production of goods and services.

Economic Growth – Human Capital

Organisations can help to develop human capital, but the ownership of human capital remains in the control of the owner. Secondly, physical capital is often relatively illiquid because it is usually designed to fulfill a particular purpose. For example, take the Coca-Cola Company’s corporate headquarters in Atlanta.

For example, a machine may be able to make a pair of sneakers, but a human would need the knowledge to build that machine and operate it. Physical capital is one of what economists call the three main factors of production. It consists of tangible, human-made goods that assist in the process of creating a product or service. The machinery, buildings, office or warehouse supplies, vehicles, and computers that a company owns are all considered part of its physical capital.

In an economic sense, advanced education, job-specific training, and innate talents are typical ways in which people build cultural capital in anticipation of earning higher wages. Human capital is the collective intangible resources that are possessed by the human. It includes skills, talents, abilities, intelligence, wisdom, judgement, experience and training which can be possessed by an individual or a group.

He first calculates the expected rates of return of the required physical capital to a range of investments and then makes a rational decision as to which investment he should make. The formation of physical capital mostly consists of economic and technical processes. The former comprises all the employees’ academic and professional credentials, experience, abilities, skills, and circle of networks relevant to the business (2).