Human Capital Definition: Types, Examples, and Relationship to the Economy

human resources
human capital refers

It includes skills, talents, abilities, intelligence, wisdom, judgement, experience and training which can be possessed by an individual or a group. Investments in human capital can increase productivity and innovation, while investments in physical capital can expand production capabilities. Harvard University is not Harvard University because of its crimson logo.

Physical capital, on the other hand, is made up of the skills, experience, talent, education, abilities, and so on that humans have individually or collectively. Both physical and human capital investments result in fundamental improvements to the company model and improved overall decision-making. Physical capital is a subset of capital, and other subsets include financial capital , human capital, social capital, and knowledge capital. Since the birth of capitalism and mechanized production, physical capital has been considered a stock of capital goods.

difference between physical and human capitalHuman CapitalPhysical capital is tangible.Human capital is intangible.It can be easily sold in the market.It cannot be sold in the market.It depreciates with the passage of time. The difference between physical and human capital is that physical capital can be seen and touched. Human capital is the sum total of the human’s aggregate intangible resources.

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Related Differences and Comparisons

It encompasses a wide range of attributes that may be held by a person or a community, such as intellect, knowledge, discernment, and training. Human capital may be used to develop tangible wealth in an economy or a business. Examples of human capital include communication skills, education, technical skills, creativity, experience, problem-solving skills, mental health, and personal resilience.


Similar ratios used to measure and evaluate the performance of investments in physical capitals are also used in the case of human capital. Investments in both of these capitals lead to fundamental improvements in a business and better chances of achieving long-term goals. Examples of intangible assets include intellectual property such as brands, patents, customer lists, licensing agreements, and goodwill.

What is Human Capital?

While physical capital refers to a company’s or economy’s resources, human capital is the worker’s talents, education, preferences, and so on that, they bring to the table. Physical capital, on the other hand, refers to items that have been manufactured by humans and are being brought or invested by a business in order to make products. If seen from the economic development point of view, human resources are important. In today’s world, it is believed that to build a strong nation, it is essential to focus on the development of people and the organisation of human activity.

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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. The skills acquired by an individual through education, training and/or experience, which add up to his/her value to the process of production is known as Human Capital. In simple terms, human capital is the stock of ability, expertise, skill, knowledge, and education embodied in an individual. One requires human capital to make effective use of their physical capital. We have plenty of human resources but to make them into human capital it is essential to invest in human capital.

Main Difference Between Human Capital and Physical Capital

There is a strong relationship between human capital and economic growth, which is why it can help boost the economy. That’s because people come with a diverse set of skills and knowledge. This relationship can be measured by how much investment goes into people’s education. Both physical and human capital undergo depreciation, but the reason is different, in the sense that physical capital is depreciated because of costant use. On the other side, human capital is depreciated out of ageing factor but can be reduced to a larger extent by making investment in health and education.

  • Physical capital refers to all non-human assets created by human and used in the production process such as machinery, buildings, vehicles, etc.
  • Physical capital refers to manmade assets that are used in the production process to manufacture goods and services.
  • The value of human capital increases with time as a result of increased education and health.
  • Timothy Li is a consultant, accountant, and finance manager with an MBA from USC and over 15 years of corporate finance experience.

The formation process is a significant difference between human capital and physical capital. The formation of human capital is not an industrial process; it is a social one. Additionally, it is also a result of the decision-making of an entrepreneur or manager. Recruitment and training play a big role in building up human capital. Since human capital relies on the investment of employee expertise and data by way of training, these investments in human capital may be simply calculated. HR managers can calculate the whole income before and after any investments are made.

On the basis of sufficient knowledge, decision is taken to invest in the physical capital. For this purpose the entrepreneur, finds out the expected returns from the range of investments and then the one, generating relatively higher return is chosen. Therefore, the ownership of physical capital is a result of planned and conscious decision of the entrepreneur.

Definition of Human Capital

According to analysts, physical capital is an important aspect of evaluating a company’s valuation. Surprisingly, it might be one of the most difficult things to value. To begin, economists frequently disagree on the specific characteristics of the three production components.

Both physical and human capitals are the building blocks of any successful enterprise. Any company that can seamlessly integrate these two will achieve its targets more efficiently. In terms of economics, the difference between physical capital and human capital is a vital chapter. Apart from this, for other topics related to economics and commerce, students can visit the official website of Vedantu.

Human capital refers to the collective intangible resources that humans possess. In classical economics, physical capital is recognized as one of the essential capitals of the industrial process. The result’s larger output for the economy and higher earnings for the person. Unlike bodily capital, which is straightforward to search out on the balance sheet , the worth of human capital is commonly assumed. There is a strong relationship between human capital and financial growth. Because folks include a diverse set of skills and information, human capital can certainly assist enhance the economy.

It can be in the form of money or assets that when utilized help the organization to earn a profit. Physical capital appears on the financial statement of the company. However, human capital does not appear on any financial statement.

It is a standard used to ascertain the economic value of an employee’s skill set. Both of these capitals go through depreciation, but the reasons are not the same. Therefore, uncertainty surrounds this capital because when an employee leaves a company, it loses a portion of its human capital. Ask Any Difference is made to provide differences and comparisons of terms, products and services. So, management actions can affect the human capital potential to impact the performance of the organisation both positively and negatively. Organisations can help to develop human capital, but the ownership of human capital remains in the control of the owner.

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An organization’s physical capital is a critical component that creates value. There is a long economic life for many forms of physical capital. During the manufacturing process, the physical capitals are not destroyed or consumed, but they might be depleted over time. Every part of an organization is involved in human capital management. A company’s employee-organization relations are taken into consideration while making management choices and actions. As a result, management decisions may have a favorable or negative influence on the organization’s success.

Human capital includes the knowledge base of the employees and is often measured by the quality of the product. It also refers to the network of the employee base and the general level of influence they have on the industry. A balance sheet only lists intangible assets when they have identifiable values.

This capital is a constant source of innovation and creative solutions. This standard is used to determine the value of an individual’s skill set. However, this concept also makes it clear that every employee is not equal. They are differentiated based on what they bring to the company. Physical capital refers to tangible assets like machinery, buildings, and technology.

An owner or entrepreneur calculates the expected return from the investments that he/she is making and based on that calculation selects the option, which offers a relatively higher return. Therefore, it can be stated that the ownership of any physical capital is a product of planning and conscious decision-making. While the value of human capital in terms of money is not easy to measure, the influence of investments in it can be calculated and analyzed.

Analysts can assess the impact of human capital on operations by employing efficiency ratios like return on assets and return on equity , in addition to goodwill . The balance sheet summarises the value of all physical assets as well as some non-physical assets. It also summarises the capital raised to pay for the assets, which includes both physical and human capital. Physical capital, on the other hand, refers to man-made commodities that a firm brings or invests in making things. It allows a corporation to keep its liquidity while expanding its activities.

Intangible assets include intellectual property such as brands, patents, customer lists, licensing agreements, and goodwill. Goodwill is produced when one company acquires or purchases another, and the purchase price exceeds the worth of the real assets purchased. Explain the difference between physical capital and human capital.

Physical capital formation can be built even through imports. Economic capital is distinguished from financial capital, which incorporates the debt and fairness accumulated by businesses to operate and broaden. Human capital theory holds that it is possible to quantify the worth of those investments to employees, employers, and society as a whole. According to human capital theory, an enough funding in people will result in a growing financial system. In the sphere of enterprise administration, human capital principle is an extension of human sources management.

She has held multiple finance and banking classes for business schools and communities. I’ve put so much effort writing this blog post to provide value to you. It’ll be very helpful for me, if you consider sharing it on social media or with your friends/family. In business, capital can be anything that increases the value of your business. The offers that appear in this table are from partnerships from which Investopedia receives compensation. Investopedia does not include all offers available in the marketplace.

It is a culmination of talent, skill, knowledge, experience, abilities, attitude, etc. Physical capital is illiquid which challenges adding value to the physical capital. Sometimes, equipment and machinery are customized according to the production process and purpose. Because physical capital is illiquid, adding value to it is difficult. The manufacturing method and goal may necessitate the customization of equipment and machinery. As a result, the organization is having difficulty determining the value of its equipment and apparatus.

Labor productivity is a term for the output of labor per hour. Net national product is the total value of finished goods and services produced by a country’s citizens overseas and domestically, minus depreciation. In more recent times, the term was used to describe the labor required to produce manufactured goods. But the most modern theory was used by several different economists including Gary Becker and Theodore Schultz, who invented the term in the 1960s to reflect the value of human capacities.

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