A:

Capital goods and consumer goods are classified based on how they are used. A capital good is any good deployed to help increase future production. The most common capital goods are property, plant and equipment, or PPE. Consumer goods are any goods that are not capital goods; they are goods used by consumers and have no future productive use.

Economists and businesses pay special attention to capital goods because of the role they play in improving the productive capacity of a firm or country. In other words, capital goods make it possible to produce at a higher level of efficiency.

For a simple explanation of how capital goods increase marginal productivity, consider two workers who are digging ditches. The first worker has a spoon and the second worker has a tractor with a hydraulic shovel. The second worker can dig much faster because he has the superior capital good.

Capital Goods

Capital goods are also known as intermediate goods, durable goods or economic capital. They are different than financial capital, which refers to funds companies use to grow their businesses. Natural resources not modified by human hands are not considered capital goods, although both are factors of production.

Businesses do not sell capital goods, which means capital goods do not directly create revenue like consumer goods. To financially survive the accumulation of capital goods, businesses rely on savings, investment or loans.

Consumer Goods

A consumer good is any good purchased for consumption and not later used for the production of another consumer good. Consumer goods are sometimes called final goods. When economists and statisticians calculate gross domestic product (GDP), they do so based off of consumer goods.

The same physical good could be a consumer good or a capital good. An apple bought at a grocery store and immediately eaten is a consumer good. An identical apple bought by a company to make apple juice is a capital good. The difference lies in its utilization.

RELATED FAQS
  1. How are industrial goods different from consumer goods?

    Understand the difference between industrial goods and consumer goods, and learn the different types of industrial goods ... Read Answer >>
  2. What is 'capital' in relation to the factors of production?

    Find out what economists mean by physical capital, how it contributes to the productivity of labor and why it is a crucial ... Read Answer >>
  3. Which economic factors most affect the demand for consumer goods?

    Understand how key economic factors such as inflation, unemployment, interest rates and consumer confidence affect the level ... Read Answer >>
  4. What is the difference between financial capital and economic capital?

    Read about the differences between types of financial capital, which companies use to raise money, and economic capital models ... Read Answer >>
  5. What does marginal utility tell us about consumer choice?

    Learn how marginal utility influences consumer choice under the law of diminishing marginal utility and consumer decisions ... Read Answer >>
  6. What are some limitations of the consumer price index (CPI)?

    Explore some of the basic limitations of the widely used economic indicator, the consumer price index, or CPI, and examine ... Read Answer >>
Related Articles
  1. Personal Finance

    How the Financial Services Sector Differs From Banks

    Learn about the difference between the banking industry and the financial services sector and how to distinguish financial goods from financial services.
  2. Investing

    M&A Deals in Consumer Goods Hit 15-Year High

    Big consumer goods companies are increasingly relying on buying their sales growth.
  3. Insights

    The Consumer Price Index

    Find out how this economic measure can help you make key financial decisions.
  4. Insights

    Do Deflationary Shocks Help Or Hurt The Economy?

    Find out how deflationary shocks can both benefit and hurt consumers and businesses.
  5. Investing

    What's the Balance of Trade?

    The balance of trade is the difference between the value of all the goods and services a country exports and the goods and services it imports.
  6. Personal Finance

    The Psychology Behind Why People Buy Luxury Goods

    Luxury goods are a great example of how irrational we can be; a decent and sturdy handbag can be purchased for $50, yet people will still spend thousands to buy a brand name. Why?
  7. Investing

    Ares Capital (ARCC) to Buy Rival for $3.4 bln (ARCC, ACAS)

    Private equity firm Ares Capital inks deal to acquire smaller rival American Capital for $3.4 bln in stock and cash.
  8. Investing

    How to make a winning long-term stock pick

    Discover the key elements of making a winning stock pick and a good long-term investment using fundamental and economic data analysis.
  9. Insights

    Deadly Flaws in Major Market Indicators

    These indicators give investors and experts some data to work with, but they're far from perfect.
RELATED TERMS
  1. Private Good

    A private good is a product that is purchased to be consumed, ...
  2. Intermediate Good

    An intermediate good is a good or service used in the eventual ...
  3. Capital Goods Sector

    The capital goods sector refers to a grouping if publicly-traded ...
  4. Durables

    Durables are consumer goods that do not have to be purchased ...
  5. Convenience Good

    A convenience good is an item that is widely-available and can ...
  6. Capital

    Capital is a term for financial assets or their financial value, ...
Hot Definitions
  1. Business Cycle

    The business cycle describes the rise and fall in production output of goods and services in an economy. Business cycles ...
  2. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  3. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  4. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  5. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  6. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
Trading Center