Question

Define capital goods.

Hint:

Capital goods are final goods that help in producing other goods and services. They are not used up completely in the same year. Machines and tractors are examples.

Answer 1

Step 1: Understand what the question asks:
The question asks for the meaning of capital goods. This is a definition question carrying 2 marks, so we need a clear definition and the feature that makes these goods special.
Capital goods belong to the topic of national income accounting. There, goods are sorted by how they are used: some are consumed, some are used up in production, and some stay in production for many years.

Step 2: State the definition:
Capital goods are final goods that help in the production of other goods and services.
They are not completely used up in the same year. They keep working for several years, though they wear out slowly.

Step 3: Explain the two key features:
Feature 1: They are used as an aid to production. A machine does not satisfy any want directly. It helps a worker to make cloth, bread or steel.
Feature 2: They last longer than one year. Because of this, they are not an intermediate good, which is used up fully within the year.
Their value is not deducted as an intermediate cost. It is counted as investment (capital formation) and wear and tear is recorded as consumption of fixed capital.

Step 4: Give examples and a quick contrast:
Examples: machines, tools, tractors, factory buildings and trucks.
A consumer good such as a loaf of bread is used by households directly. A capital good such as a bakery oven is used to make the bread, year after year.

Final Answer:
Capital goods are final goods that help in producing other goods and services and are not completely used up in the same year.