What it is: Capital goods are man-made items that are used to produce goods or provide services. In getting their benefits, there is no need for further processing. And, they also don’t form a component of the output. Examples of capital goods are machinery, equipment, logistics vehicles, and property.
The purchase and sale of capital goods usually take place between business to business. It is also possible through the wholesaler channels.
Following are the characteristics of capital goods:
- Used to produce goods or provide services
- Sold to businesses and not for personal use
- Has a long useful life
- Price per unit is expensive
- Not part of the final output
The importance of capital goods
Analysts often observe a company’s capital spending to assess the potential for future growth. They expect higher growth when capital spending increases. They check the cash flow statement to see how much the company is spending on capital from year to year.
Companies spend a lot of money on capital goods – we call this capital expenditure (CAPEX). Such spending helps them to increase their production capacity in the future. So, if capital expenditure increases, we will anticipate them to produce more output in the future.
The difference between capital goods, consumer goods, intermediate goods, and raw materials
Capital goods are finished goods. They are useful not for themselves but to help produce other goods and provide future services. So, to get the benefits, the business will not process them further.
Firms use capital goods to process output. They are not part or component of the final item. It differs from raw materials or semi-finished goods, which firms have to further process to produce output. Both are part of the output.
Meanwhile, consumer goods are for end-use. The benefits will soon run out when you consume them. Also, you cannot use them to produce other products.
Furthermore, capital goods are man-made goods. It differs from raw materials, which usually come from nature.
Take, for example, aluminum production. Aluminum producers use a machine to process raw materials (bauxite) into aluminum plates. And, the machine, of course, doesn’t form aluminum plate components.
The company then ships the aluminum to the automaker, who will process it into the car’s frame.
An aluminum factory might buy a logistics truck from an automaker. And, households buy passenger vehicles from carmakers.
In the example above, bauxite and aluminum are the raw material and intermediate goods, respectively. Meanwhile, machines are capital goods, as are logistics trucks. But passenger cars are consumer goods.
Capital goods are more durable than consumer goods, raw materials, or semi-finished goods. The useful life can be more than 3 years. Meanwhile, consumer goods, although there are also durable goods, are not more than three years old. Meanwhile, raw materials and semi-finished goods will soon run out when they are processed into final products.