August 2, 2021

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Capital Goods Industry meaning and Key Explanations

Capital Goods Industry meaning and Key Explanations
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Another way to see business is by the use of its products. A firm that produces materials, other businesses can rely on, falls under the capital goods industry. Some of these entities are basic industries as well. In this article let’s explain this term.

Definition of Capital Goods Industry

Capital goods industry is a type of industry that deals with the manufacture or sale of products used in the production of other goods and the rendering of services.

Key Explanations

Goods produced or sold by companies for further processing. Entities here cannot sell to the final consumers. What they do is sell their products to other companies that use them to make goods for consumers. For example, they could sell fish to food sellers, who processed the fish either by cooking or frying. Then sell the processed fish to final consumers. For context, fishermen also fall under the basic goods industry.

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Most capital goods are expensive. Properties, plants, and equipment are costly. Also, government capital goods (also called CAPEX or capital expenditure) like roads, bridges, schools, hospitals, and so on are expensive and involve huge borrowings. In addition, it takes many years to finalize this item.

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Affected by foreign exchange. The foreign exchange rate affects capital goods. Why? The goods are imported from developed countries. In Nigeria, the issue is alarming. The constant devaluation of Nigeria’s dollar exchange rate is affecting the price of capital goods. As a result, importing these items is difficult.

They can be agricultural products. Property, plants, and equipment are not the only capital goods. We use agricultural products in producing other goods. Although agriculture is the mainstream of every economy, in Nigeria, oil is a big deal. Therefore, manufacturing firms find it difficult to source this produce (or raw materials from farms) locally. Therefore, they either owned the farm or import the agricultural produce. The result is the high price of goods in the country.

Another area to examine is depreciation. These products depreciate or depleted. We depreciate plants and equipment. The reason? Their value reduces as a result of usage. Therefore, it is necessary to write off part of the amount as depreciation. Moreover, we use depletion for natural resources. When natural resources are extracted, the portion removed from its sources cannot be replaced, that part has depleted.

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Examples of Capital Goods Industry

Property, plants, and equipment (PPE) are perfect examples of capital goods. Property such as land and building is needed to house whatever will require further production. Plants are used to process materials to finished goods and equipment adds more flavor or makes jobs easier.

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Technology products. Tech products are another example. The Internet is one capital goods that people are not aware of. With it, further production is taking place. For example, without the internet, this article will not be in existence in the first place. Many businesses are using this as an opportunity to scale. Computers, phones, chips, robots, codes, or software are tech products that have been used to make other products.

Agricultural produce. This is the primary source of capital goods. Especially in manufacturing and health care firms. Here, the basic aspects are tree planting, crops, rearing animals, fish farming, and so on.

Natural resources. Gold, silver, metals, sands, crude oil, water, air, and more are natural resources. These resources are extracted either from land, sea, or air. They are a good example because they are needed for processing other goods.

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Infrastructural Facilities. Electricity, roads, bridges, seaports, airports, government buildings, and more form parts of infrastructure made available by the government of a country to aid the production of goods and services. Also, the government buys war aircraft and ships to defend its army, and these fall under government expenditure.

Conclusion

Capital goods are required for the production of other goods and services. This product can be in the form of property, plant and equipment, technology products, agriculture, natural resources, and government infrastructure. In Nigeria, it will take a needle eye to source for local products. Most capital goods in the country are through importation. And this has affected foreign exchange rates times without numbers. Leading to high prices of goods and services.

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