Capital Goods with Examples and their Effect on the Economy
How It Drives Business Success
Capital goods are man-made, durable items businesses use to produce goods and services. They 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 can also mean financial capital. 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. The other three are:
- Natural resources, such as land.
- Labor, such as workers.
- Entrepreneurship, which is the drive to create new companies. (Source: "Factors of Production," St. Louis Federal Reserve.)
How Much the United States Produces
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 homogeneous companies as well as single-unit manufacturers in 89 industry categories.
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.
Since 2000, Silicon Valley has become the U.S. innovation center. That's important because capital goods production 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.
Here are eight 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 United States a leader in clothing manufacturing.
- The invention of 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 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 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 use on an everyday basis.
The Census Department measures both orders and shipments. The latter usually show up in that quarter's gross domestic product estimate. Orders don't show up until later, when the goods are manufactured and shipped. When orders for core capital goods rise, GDP will increase 6 months to12 months later.
Capital Goods Versus Consumer Goods
Unlike capital goods, consumer goods are not used to create other products. But some of them can be durable goods, as well. Like capital goods, durable consumer goods are heavy-duty and long-lasting.
They’re the appliances bought by households, such cars, refrigerators and dryers. Shipments of consumer goods are also included in U.S. GDP. As a result, consumer spending drives almost 70 percent of GDP.
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. 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. They include commercial buildings, like factories, offices, and warehouses. They would include apartment buildings because they are used to provide rental housing, which is a service. They 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.