What Are Capital Goods?

Capital Goods Explained

what are capital goods? tools, buildings, machinery, equipment, vehicles

The Balance / Hilary Allison

Capital goods are man-made, durable items that businesses use to produce goods and services. These might include tools, machinery, or buildings.

Capital goods are one of the primary factors of production. Learn how businesses use them and how they impact manufacturing jobs.

Definition and 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.

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:

  1. Natural resources, such as land, oil, and water
  2. Labor, such as workers
  3. Entrepreneurship, which is the drive to create new companies

Alternate names: durable goods, real capital, economic capital

How Do Capital Goods Work?

Any man-made durable item used to do 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 services. Examples of capital goods are buildings, furniture, and machines like construction vehicles. All 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 report measures 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. This tells how well U.S. businesses are doing. When businesses order more capital goods, it's a sign that they expect production to go up. This shows that the economy and GDP are going to grow.

The Census Bureau provides the durable goods report. It surveys companies that ship more than $500 million worth of goods a year. These companies may be part of large corporations. They also include single-unit manufacturers in 89 industry categories. 

Notable Happenings

The United States has been a technological innovator in creating capital goods, from the cotton gin to drones. Since 2000, Silicon Valley has become the U.S. innovation center. 

Capital goods production creates more manufacturing jobs than do other industries. These are among the most well-paid positions, averaging $70,000 per year. America's success as a provider of capital goods has created a comparative advantage for the country. That helped it to remain the world's largest economy until China attained that spot. 

The history of manufacturing contains many examples of how new capital goods also create economic advantages. These inventions drove the creations 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 made the United States a leader in clothing manufacturing.
  • The invention of Morse code and the telegraph in 1849, followed by Graham Bell's telephone in 1877, made communication faster.
  • Thomas Edison invented a safe incandescent lamp in 1880. That allowed people to work longer and made urban living easier.
  • Steamboats led to steam locomotives, which paced the way for coast-to-coast commerce, growth, and travel.
  • In 1902, air conditioning allowed 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 1908, Ford's assembly line allowed mass production of affordable cars. That increased demand for expanded travel and led to the 1956 Interstate Highway Act. It improved shipping and created a higher suburban standard of living.
  • In 1926, Robert Goddard invented the liquid propulsion rocket. That 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 another leading indicator of economic growth. They don't include defense equipment and 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 Department measures both orders and shipments. The latter shows up in that quarter's gross 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 increase six months to 12 months later.

Capital Goods vs. Consumer Goods

Unlike capital goods, consumer goods are not used to create other products.

Both capital goods and consumer goods can be durable goods.

Like capital goods, durable consumer goods are 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 they are depends on how the items are used.

Shipments of consumer goods are also included in U.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 any 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 produce 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.

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 all 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 the economy will grow.