Capital Goods (Indirect Goods)

Capital goods are economic goods used in the production of other goods. They are known as indirect goods because they indirectly fulfill human needs by facilitating the creation of final goods (consumer goods). In production processes, capital goods include both fixed capital (such as machinery and industrial equipment) and circulating capital (such as raw materials, production inputs, and energy) utilized by businesses. These goods are also referred to as intermediate goods.

Key Features of Indirect Goods

Indirect goods are economic goods that satisfy human needs indirectly by supporting the production of other goods. They play a critical role in production processes, enabling the manufacturing of products that address human needs. For this reason, they are also referred to as capital goods or intermediate goods.

The diagram above illustrates two businesses, A and B. Company A produces the good B_I, which it sells to Company B. Company B uses B_I as a production input to manufacture the good B_D, which is then sold to consumers. Good B_I is classified as an indirect good (or intermediate good) because it is used in the production of other economic goods. Conversely, good B_D is not an indirect good but a consumer good (direct good), as it directly meets the needs of the end consumer.

Distinguishing Capital Goods from Consumer Goods

Whether a good is considered capital depends on its use. The physical characteristics of economic goods do not inherently determine whether they are capital goods. The same economic good can serve different purposes: it can be used in the production of other goods (making it a capital good) or it can satisfy human needs directly (making it a consumer good). For instance, a car may be considered a capital good for a sales agent during the workweek but serves as a consumer good for the agent's family during weekends.