Definition
Physical capital is the stock of durable, human-made resources that an economy uses to produce other goods and services. It includes machinery, tools, factories, office buildings, vehicles, computers, and infrastructure such as roads and power grids.
Physical capital is one of the classic factors of production, alongside labor, land, and entrepreneurship. Unlike consumer goods, capital is not used up at once; it is held and used repeatedly to make output over many production cycles.
Why it matters
How it works
A firm or country adds to its physical capital through investment, financed out of saving. More capital per worker generally raises output per worker, so capital deepening is one route to higher living standards.
But physical capital faces diminishing returns. Each additional machine added to a fixed workforce yields a smaller boost than the last, and capital wears out and must be replaced. Sustained long-run growth therefore depends on ideas and technology as well as on accumulating capital.