What is the difference between physical capital and human capital?
Capital refers to the owners’ equity in the business organization. It can be in the form of money or assets that when utilized help the organization to earn a profit.
The lesson provides the difference between physical capital and human capital with examples to make it easier for understanding.
What Is Physical Capital?
Physical capital refers to factors of production that foster the manufacturing process of raw materials into finished products. Physical capital examples are machinery, computers, tools, and equipment among many others.
Most of the physical capital is tangible though prone to depreciation due to constant use that leads to wear and tear. Besides that, they are easy to be identified.
What Is Human Capital?
Human capital refers to a set of individual’s skills, talents, abilities, and knowledge brought into the organization. These workers rent out their services and later get compensated.
Human capital is intangible and cannot be separated from the owners. It can be reduced due to aging and it is normally not shown on the financial statements.
Comparison Chart: Physical Capital Vs Human Capital
| Basic Terms | Physical Capital | Human Capital |
| Meaning | Refers to factors of production that facilitate the transformation of raw materials into finished goods | Refers to an individual’s skills, knowledge, abilities, and talent to enhance production |
| Nature | Tangible | Intangible |
| Formation | The economic and technical process | Social process and conscious decision |
| Tradability | Can be exchanged in the market | Only services can be rendered |
| Separability | Separable from the owner | Inseparable from the owner |
| Financial Statement | Tend to be shown | Cannot be shown |
| Restriction mobility | Due to the trade barrier | Due to nationality and culture |
| Nature of Depreciation | Constant usage | Due to aging |
| Ease of Measurement | Easy to identify and calculated | Quite more complex due to indirect nature |
| Management | Generic and impersonal | Personalized, creative and customized |
Core Differences between Physical Capital and Human Capital
- Physical capital is tangible whereas human capital is intangible
- The management of human capital is personalized and creative while that of physical capital is generic and impersonal.
- Depreciation of physical capital occurs due to constant usage while that of human capital due to aging.
- Physical capital is outlined in financial statement unlike human capital
- Physical capital can easily be identified and calculate while human capital is more complex
- The mobility of physical capital is due to a trade barrier while that of human capital is due to nationality and culture
- Physical capital can be separated from the owner while human capital is inseparable from the owner
- Physical capital can be traded in the market whereas human capital only services are rendered.
- Formation of physical capital is an economic and technical process whereas human capital is a social process and conscious decision.
- Physical capital comprises of machinery, tools, and equipment whereas human capital comprises of skills, talent, and abilities
Comparison Video
Summary
The core difference between physical capital and human capital is that physical capital refers to factors of production while human capital refers to what workers bring into the company in the form of skills, abilities, and talent.