Which of the following is a factor that favors the development of primary economic activities

When economists refer to capital, they are referring to the assets—physical tools, plants, and equipment—that allow for increased work productivity. Capital comprises one of the four major factors of production, the others being land, labor, and entrepreneurship. Common examples of capital include hammers, tractors, assembly belts, computers, trucks, and railroads. Economic capital is distinguished from financial capital, which includes the debt and equity accumulated by businesses to operate and expand.

Key Takeaways

• In economics, capital refers to the assets—physical tools, plants, and equipment—that allow for increased work productivity.
• By increasing productivity through improved capital equipment, more goods can be produced and the standard of living can rise.
• The four major factors of production are capital, land, labor, and entrepreneurship.

The Economic Role of Capital

Capital is unlike land or labor in that it is artificial; it must be created by human hands and designed for human purposes. This means time must be invested before capital can become economically useful. For example, the fisher who fashions themself a rod must first divert time from other activities to do so.

In this sense, capital goods are the foundation of human civilization. Buildings need to be built, tools crafted, and processes improved. By increasing productivity through improved capital equipment, more goods can be produced and the standard of living can rise. Capital goods are also sometimes referred to as the means of production because these physical and non-financial inputs create objects that can eventually be bestowed with economic value. The economist Adam Smith defines capital as, "that part of man's stock which he expects to afford him revenue."

Goods vs. Money

Ever-improving capital is important because of what follows its production: cheaper and more bounteous goods. Note that money is not included among the factors of production. While money facilitates trade and is an effective measure of a good's value, individuals cannot eat, wear, or be sheltered by money itself. The ultimate aim of economic activity, work, and trade is to acquire goods, not money. Money is a means to afford goods. Better capital goods allow people to travel farther, communicate faster, eat better foods, and save enough time from labor to enjoy leisure. Many countries have printed and inflated their way into poverty by losing focus on savings, investment, and capital equipment in favor of increasing their money supply by printing more of their currency.

Capital Goods Production Process

Before a factory can be built or a car can be manufactured, someone must have saved enough resources to be able to survive the production process. This involves forgoing present consumption in favor of greater future consumption.

Every capital production process starts with savings. Savings help by generating investments. Investments eventually lead to finished goods and services. Traditionally, it is the role of the capitalist to first save and then assume risk by employing people in production processes before revenue is generated from the finished goods. All of the factors of production interact with one another. Natural resources are transformed into capital goods by human labor and subjected to market risk through entrepreneurial activity.

Each factor of production is able to contribute to production processes and earn an income based on its use. The income for land is usually called rent. Labor receives wages. Employed capital goods and equipment receive interest, normally through their investment. Successful entrepreneurs receive profits.

Economists generally agree that economic development and growth are influenced by four factors: human resources, physical capital, natural resources and technology. Highly developed countries have governments that focus on these areas. Less-developed countries, even those with high amounts of natural resources, will lag behind when they fail to promote research in technology and improve the skills and education of their workers.

The Impact of Human Resources

The skills, education and training of the labor force have a direct effect on the growth of an economy. A skilled, well-trained workforce is more productive and will produce a high-quality output that adds efficiency to an economy.

A shortage of skilled labor can be a deterrent to economic growth. An under-utilized, illiterate and unskilled workforce will become a drag on an economy and may possibly lead to higher unemployment.

Investment in Physical Capital

Improvements and increased investment in physical capital – such as roadways, machinery and factories – will reduce the cost and increase the efficiency of economic output. Factories and equipment that are modern and well-maintained are more productive than physical labor. Higher productivity leads to increased output.

Labor becomes more productive as the ratio of capital expenditures per worker increases. An improvement in labor productivity increases the growth rate of the economy.

Quantity and Availability of Natural Resources

The quantity and availability of natural resources affect the rate of economic growth. The discovery of more natural resources, such as oil or mineral deposits, will give a boost to the economy by increasing a country's production capacity.

The effectiveness of a county at utilizing and exploiting its natural resources is a function of the skills of the labor force, type of technology and the availability of capital. Skilled and educated workers are able to use these natural resource to spur the growth of the economy.

Improvements in Technology

Improvements in technology have a high impact on economic growth. As the scientific community makes more discoveries, managers find ways to apply these innovations as more sophisticated production techniques.

The application of better technology means the same amount of labor will be more productive, and economic growth will advance at a lower cost.

Countries that recognize the importance of the four factors that affect economic growth will have higher growth rates and improved standards of living for their people. Technological innovation and more education for workers will improve economic output which lead to a better living environment for everyone. Increases in labor productivity are much easier to achieve when investments are made on better equipment that require less physical work from the labor force.

What are the 4 types of economic activity?

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Which factor is most directly related to the level of economic development of a country?