Capital Goods

Capital goods are tangible, durable assets a business uses to produce goods or deliver services. They are classified as fixed assets—often called plant, property, and equipment—and differ from consumer goods, which are the finished products purchased by end consumers.

Key takeaways

• Capital goods are physical assets used in production, such as machinery, buildings, vehicles, and tools.
• They are treated as fixed assets in accounting and are depreciated over their useful lives.
• Consumer goods are the end products sold to consumers; capital goods enable their production.

Types of capital goods

Capital goods cover a broad range of physical assets used in manufacturing and services:
* Industrial machinery and assembly-line equipment
Manufacturing technology and electronics (e.g., imaging systems, control hardware)
Buildings, factories, and specialized facilities
Transportation and infrastructure used in business (trains, delivery vehicles, broadband lines)
Service-sector equipment (hair clippers, coffee machines, restaurant ovens, musical instruments, landscaping tools)

Capital goods vs. consumer goods

• Consumer goods: finished products bought and used by consumers (e.g., milk, clothing, appliances).
• Capital goods: used by businesses to produce those consumer goods and services.
  Some items (for example, airplanes) can function as capital goods for businesses and as consumer purchases in other contexts.

Examples

• Factory equipment used to build automobiles
• Ovens and kitchen equipment in a restaurant
• Delivery vans for a logistics company
• Coffee machines in a café
• Broadband lines or rail infrastructure used to provide services

Core capital goods

Core capital goods refer to capital equipment excluding volatile categories such as aircraft and certain defense-related items. They are often tracked by economic agencies as a proxy for business investment and capital expenditure trends.

Depreciation and accounting

Capital goods typically cannot be expensed fully in the year of purchase. Instead:
* Their cost is allocated over their useful life through depreciation.
* Depreciation spreads tax deductions across multiple years and reflects the asset’s annual loss of value.

Why businesses invest in capital goods

Business investment in capital goods enables:
* Increased production capacity and efficiency
Expansion into new products or services
Modernization and automation to lower long-run costs

Conclusion

Capital goods are essential physical assets that allow businesses to produce goods and deliver services. Understanding their types, accounting treatment, and role in production helps explain investment decisions and broader economic activity.