Capital Goods: Examples, Effect on Economy

How It Drives Business Success

A Boeing 737 taking off at sunset. Commercial aircraft are a large component of capital goods.
David Nunuk/Getty Images

Capital goods are man-made, durable items businesses use to produce goods and services. These items include tools, machinery, and equipment. Capital goods are also called durable goods, real capital, and economic capital. Some experts just refer to them as "capital." This last term is confusing because it is also used to mean financial capital. In accounting, capital goods are treated as fixed assets.

That's also known as plant, property, and equipment (PP&E).

Capital goods are one of the four factors of production. The other three are:

  1. Natural resources, such as land.
  2. Labor, such as workers.
  3. Entrepreneurship, which is the drive to create new companies. (Source: St. Louis Federal Reserve, Factors of Production)

How Much Capital Goods Are Produced?

In the United States, the monthly Durable Goods Orders Report measures capital goods production. It reports capital goods shipments, new orders, and inventory. Check it each month because it is one of the most revealing leading economic indicators.

The Census Bureau provides the Durable Goods Report. It surveys companies that ship more than $500 million a year. These companies may be divisions of big diversified corporations. They also include large homogenous companies, or single-unit manufacturers in 89 industry categories. (Source: U.S. Census, Durable Goods Order Reports)

How Capital Goods Drive U.S. Economic Success

The United States has been a technological innovator in creating capital goods, from the cotton gin to drones. That's important because it creates more manufacturing jobs. These are among the most well-paid positions, averaging $70,000 a 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 2015 when China attained that spot. For more, see Silicon Valley: America's Innovative Advantage.

Here are some examples of how U.S. innovations in capital goods created these advantages.

  • In 1789, Samuel Slater improved textile manufacturing. Eli Whitney invented the cotton gin in 1793. These made the U.S. a leader in clothing manufacturing.
  • The invention of the Morse code and the telegraph in 1849, and 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 more attractive.
  • Steamboats led to steam locomotives. They allowed private railroad networks to facilitate coast-to-coast commerce and development of the West.
  • In 1902, air conditioning allowed migration to formerly hot areas and the ability to work effectively through the summer.
  • In 1903, the Wright Brothers' invented the airplane, leading to faster air 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. That improved shipping and a 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.

Core Capital Goods

Core capital goods are another leading indicator of economic growth. That's because they don't include defense equipment and aircraft, which are typically large orders that don't appear consistently. Core capital goods orders tell you how much businesses need on an everyday basis.

The Census Department measures both orders and shipments. The latter usually show up in that quarter's Gross Domestic Product (GDP) estimate. Orders don't show up until later, when the goods are manufactured and shipped.

In other words, when orders for core capital goods rise, GDP will increase six to 12 months later.

Capital Goods vs. Consumer Goods

Like capital goods, consumer goods are heavy-duty and long-lasting. However, they are not used to create other products. Instead, these are the appliances bought by households, such cars, refrigerators, and dryers. Shipments of consumer goods are also included in U.S. Gross Domestic Product. For more, see Consumer Spending Drives Nearly 70% of GDP.

Examples

Many items can be both capital goods and consumer goods. The difference is how the items are used. For example, 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. However, that same type of plane used for a sightseeing business is a capital good.

Here are some more examples. Capital goods include trucks and cars used by businesses, but not those used by families. It includes commercial buildings, like factories, offices, and warehouses. It would include apartment buildings because they are used to provide rental housing, which is a service. It would not include privately-owned homes.

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.