Improvements that make natural resources more productive are capital, which includes all produced resources—such things as buildings, machinery, and roads. The production of new capital is investment. Some capital wears out each year; this decline in value is depreciation. A bulldozer, for example, loses value as it ages and suffers wear-and-tear. Total investment each year is gross investment. Subtracting depreciation leaves net investment—the change in the nation's capital stock. [1] If $2 trillion is paid for new capital in 2005 while existing capital depreciates by $1.5 trillion, then net investment for the year is only $500 billion.

 

      Business firms undertake much of capital investment in the United States, but the government also invests in capital—schools, roads, and dams are examples of investment spending on capital infrastructure. In addition to technological advances, many economists identify development of a rich economic infrastructure—transportation and communications networks are other examples—as keys for growth and development. And, increasingly, economists refer to such activities as on-the-job training or acquisition of a college degree as investments in human capital.

 

      Unfortunately, the terms “investment” and “capital” are often misused from an economic perspective. Paper assets like currency or stocks and bonds are financial capital, which ultimately permits claims on finished goods or resources, including economic capital. People often fail to distinguish economic (physical) capital from financial capital— normally a document. A deed to a house is financial capital; the house itself is economic capital.. Note that capital providers receive interest—not profit; all profit goes to entrepreneurs.

 

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