There are a number of factors of production that are essential for the production process. One such factor of production is capital which may be in the form of cash, buildings, machinery, or even human skills and expertise. Human capital is the skills, knowledge, experience contributed by the firm’s employees. Physical capital refers to manmade assets that are used in the production process to manufacture goods and services. The article takes a closer look at these two types of capital, the human capital and physical capital, and explains their similarities and differences.
What is Human Capital?
Human capital refers to the skills, training, experience, education, knowledge, know-how, and competencies contributed by humans to a business. In other words, human capital can be referred to as the value that is added onto a company by an employee, which can be measured by the employee’s skills and competencies. Human capital is an important factor of production, and employing individuals with the right education, experience, skills and training can improve efficiency, productivity, and profitability.
Companies can invest in their human capital by offering training and education facilities to its workers. Training and developing employees can help them develop a broader set of skills and abilities and reduce cost of hiring additional employees with necessary skills. One thing that must be kept in mind is that humans are not equal to one another and that human capital can be developed in many ways to obtain the highest economic value to the firm.
What is Physical Capital?
Physical capital refers to assets which themselves have been manufactured and are used for production of other goods and services. In a broader term, physical capital refers to all non-human assets created by humans and used in the production and manufacturing process. Examples of physical capital include machinery and equipment used directly in the production process. Buildings are also classified as physical capital, as long as they are used in business operations. Manufacturing plants that contain all production equipment and facilities, warehouses that contain finished or work in progress products, and even buildings used for administration, accounting, sales, etc. are also referred to as physical capital. Vehicles are also considered physical capital, whether they are used for internal purposes, or are used to transport goods to their final retail destination; as long as the vehicle is used in business operations it becomes physical capital.
What is the difference between Human Capital and Physical Capital?
Human capital and physical capital are both types of capital resources that are essential to the smooth running of any business. Human capital refers to the skills, abilities, experience, and value that is brought onto a firm by its employees. Physical capital refers to all non-human assets created by human and used in the production process such as machinery, buildings, vehicles, etc. An important point to note is that physical and human capital must go hand in hand for a business to run its business operations successfully. The right human capital can enhance the value of physical capital, and without the right physical capital human capital cannot contribute to its full extent.
Summary:
Human Capital vs Physical Capital
• Human capital and physical capital are both types of capital resources that are essential for the smooth running of any business.
• Human capital refers to the skills, training, experience, education, knowledge, know-how, and competencies contributed by humans to a business.
• Physical capital refers to assets which themselves have been manufactured and are used for production of other goods and services.