What’s it: In economics, land doesn’t just refer to land for agriculture, factories, retail space, or office space. As a factor of production, it also includes various resources contained in it, such as metallic minerals, petroleum, and natural gas. And, in a broader meaning, it refers to the natural resources available for production inputs.
Various natural resources are useful as raw materials to produce various goods. For example, we process oil and natural gas into fuel and energy sources. Both can also be used as raw materials for plastics after going through the polymerization and polycondensation processes.
Like other factors of production such as capital, labor, and entrepreneurship, land suppliers also receive a reward, namely rent.
Land as input in business
And, now, let’s talk about land in a narrower definition. How businesses use it and how businesses report it in their financial statements.
Is land an asset?
In business, assets refer to the resources owned by the company and flow economic benefits to the company. Take, for example, manufacturing companies. For them, the land is an asset they own. In addition, various raw materials from nature are also their assets.
However, in contrast to land, which has a long-term useful life, companies use raw materials to produce goods. They are kept as inventory and used for day-to-day operations. And raw material inventory is a short-term asset. Meanwhile, the land is a long-term asset.
Furthermore, in accounting, land refers to real estate held for productive use or investment. Therefore, companies usually present them as fixed assets on the balance sheet, even though they are not depreciated.
Land provides economic benefits to businesses. But, it is available on fixed supply. As a result, in some locations, it is becoming increasingly rare. The rarer it is, the more expensive it is.
You can see it in big cities, where land prices are very high. The price quickly soared from time to time. So, buying land in such an area costs a lot of money.
Some companies buy land only to be held. They then resell it at a later date. They may not develop it, but it’s just a matter of time to see the price go up.
Meanwhile, other companies buy land for development. For example, they build commercial properties such as office buildings or apartments there. It increased the land’s value, and they could make more money.
However, developing commercial property on purchased land also carries risks. It can be highly expensive and uncertain in creating future cash flows. Such uncertainty could stem from uncertainty in property demand, where weak demand could reduce cash inflows and render development projects unfeasible. Other factors are taxation, government restrictions on development, or even natural disasters.
Furthermore, the land provides various economic benefits to companies, depending on their business, for example:
- Manufacturing companies buy land to set up factories and become the location for their production facilities.
- Logistics companies use it to build warehouses or logistics networks.
- Retailers use it for retail space and for warehouses for their online channels.
- Agribusiness companies use it to produce various commodities such as palm oil, rubber, and sugar cane, which later go into manufacturing to produce household and business products.
- Service companies buy it for their office buildings.
How to classify land into financial statement accounts can vary between businesses. For example, suppose a company buys it for investment purposes or as a future factory location. In that case, they classify it as an investment. Meanwhile, if they hold it for resale like a real estate company, they record it as inventory.
Companies record land at cost plus incidental costs such as real estate commissions and attorney’s fees. Other costs are escrow fees and survey fees. Further, if the company tore down an old building to clear land to build a new building, the company charges the costs into this account.
Land as a factor of production
The land is one of the four economic resources for producing goods and services in addition to capital, labor, and entrepreneurship. If previously we discussed land in a narrow definition, now we discuss it in a broader sense. From an economist’s perspective, it’s not just an area for agriculture, factory sites, and office buildings. But, it also includes various natural resources available around us as inputs for productive activities.
We utilize various minerals contained in the bowels of the earth for various purposes. For example, we use wood as input to make furniture. In addition, we use iron ore as a raw material to make various products, from automotive to household appliances.
Then, human activities can change and improve soil quality. For example, we can increase the agricultural land’s productivity through fertilization and drainage. But, on the other hand, productivity can also be reduced or destroyed due to human activities, such as illegal logging.
In general, natural resources fall into two general categories:
- Renewable resources
- Non-renewable resources
Renewable resources are available in abundance. If we use it as input, we don’t have to fear it will run out and become scarce. For example, we use water to produce renewable energy. We can also use wood to produce wood. It will not run out even if we cut it down because we can replant it, even though it takes a long time.
On the other hand, non-renewable resources are available in fixed supply. And it also doesn’t restock when we have extracted it to be production input. So, we drain it; it can run out and not be left for future generations. Examples are petroleum, coal, and other metallic minerals such as copper, nickel, tin, aluminum, and iron.
There are many natural resources available for production inputs. Now let’s take aluminum as an example. It comes from bauxite ore and is mined from nature. After processing it, we use it for input across a wide range of industries, including:
- Transport vehicle frames such as cars and airplanes.
- Canned packaging material.
- Building construction materials.
- Electrical equipment such as conductor alloys.
- Household appliances such as refrigerators, dryers, and washing machines.
Other examples of land as a factor of production are:
- Petroleum and natural gas for energy sources and raw materials for plastics.
- Wood as input for fuel, various furniture products, construction materials, and paper.
- Iron ore to make steel.
- Nickel for coating metals and making alloys such as stainless steel.
- Copper for heat and electricity conductors and building materials.
- Coal for fuel in steel mills or power plants.
Then, as a factor of production, the land also receives compensation or reward, as do labor, capital, and entrepreneurship. The reward for land is rent.