Importance of Capital in Economics

Capital can be money, natural and manufactured resources -- such as a bridge -- or labor.

Capital is very important in economics. It consists of money -- financial capital -- as well as labor and resources. Capital acts as the spark that starts a business or large purchase, such as a home or business loan.

Types

Capital is anything that generates profits and stimulates economic growth. More precisely, the University of North Carolina points out that capital is money, resources -- natural and manufactured -- and labor. A sustained, growing economy requires all three types of capital.

Function

Capital is often necessary to start a business. If an entrepreneur knows that a business venture can generate an impressive return on investment, he usually requires funds to "jump start" it. In order to raise financial capital, entrepreneurs sell debt -- stocks and bonds -- to prospective investors.

Black Markets

According to Auburn University, occasionally, capital drains faster through legal channels, such as high taxes, and legal risk -- lawsuits, for example -- than through illegal activities. Understanding capital flow is crucial to understanding why black markets occur. Hindering or exposing black markets rests largely on understanding the dynamic of financial and human capital.

References

• Ambit ERisk Co.: How to Choose the Right System for Economic Capital Analysis
• Auburn University: Black Market
• Stanford University: Economic Growth
• National Academies Press: Capital Formation and Economic Growth
• New York University: Finding The Right Financing Mix
• University of North Carolina: Introduction to Financial Markets