Measures of Capital

While labor is measured in terms of the number of workers hired or the number of hours worked, it is difficult to measure capital in terms of physical units because there are so many different types of capital goods. Capital goods, therefore, are simply measured in terms of their market or dollar value.

Capital stock. The market value of capital goods at a given point in time, for example, at the end of a year, is referred to as the capital stock. A firm's capital stock is the market value of its factory, equipment, and other capital goods at a given point in time. A household's capital stock is the market value of its residential structures, human capital, and other capital goods at a given point in time. Firms' and households' capital stocks will vary over time due to investment and depreciation.

Investment. Investment is the addition of new capital goods to a firm's or household's capital stock. Investment is a flow measurement; it represents the market value of new capital purchased or produced per unit of time. For example, if a firm with $90,000 in capital at the end of last year purchases $10,000 in capital during the current year, its investment for this year is $10,000, while its capital stock at the end of the current year is $100,000.

Depreciation. Depreciation is also a flow measurement; it measures the reduction in market value of a firm's or household's capital stock per unit of time. Depreciation of the capital stock is caused by normal wear and tear and by the obsolescence of capital goods over time.

When depreciation over a period of time exceeds investment over the same period of time, the capital stock decreases; otherwise, the capital stock increases or remains the same. For example, if the firm with $90,000 in capital at the end of last year purchases $10,000 in new capital during the current year, but experiences $20,000 in depreciation during the current year, its capital stock at the end of the current year will have decreased to $80,000 ($90,000 + $10,000 − $20,000). If depreciation during the current year is only $5,000, instead of $20,000, then the firm's capital stock at the end of the current year will have increased to $95,000.