What is the Difference Between Human Capital and Physical Capital?
🆚 Go to Comparative Table 🆚The main difference between human capital and physical capital lies in their nature and how they are represented in a business context:
- Human Capital: This refers to the economic value of an employee's skill set, which includes their knowledge, education, talents, abilities, and preferences. When an employer trains an employee, they are increasing that employee's human capital. Human capital is intangible, meaning it cannot be easily sold or separated from its owner.
- Physical Capital: This consists of tangible assets that assist in the production of a good or service. Examples include machinery, buildings, transportation, computers, and software. Physical capital is considered tangible because it can be easily sold or separated from its owner.
In terms of tracking and measuring value, physical capital is easier to track as it can be listed on a company's balance sheet and assigned a market value. On the other hand, human capital is not listed on a company's balance sheet and its value can fluctuate based on factors such as employee turnover or changes in the job market.
Both human capital and physical capital are essential for businesses to grow and maintain operations. While physical capital is important for production and liquidity, human capital contributes to the development of new ideas, products, and services, as well as improving overall business performance.
Comparative Table: Human Capital vs Physical Capital
Here is a table summarizing the differences between human capital and physical capital:
| Feature | Human Capital | Physical Capital |
|---|---|---|
| Definition | Human capital refers to the knowledge, skills, and abilities of individuals that contribute to the production process. | Physical capital consists of man-made goods used in the production process, such as machinery, equipment, and buildings. |
| Nature | Intangible and cannot be sold. | Tangible and can be sold. |
| Tracking and Measurement | Does not appear on a company's balance sheet and is difficult to measure. | Listed on the balance sheet at historical cost, not market value. |
| Mobility | Less mobile between countries compared to physical capital. | More mobile between countries. |
| Investment | Value can be enhanced through investments in training, education, and development. | Value is determined by the expected rates of return and entrepreneurs decide based on these calculations. |
| Value | Employees are considered assets whose value can be enhanced through investments in their training and improvement. | Financial benefits are derived from utilizing personnel effectively, as human capital cannot be sold. |
| Examples | Skills, abilities, knowledge, and preferences of workers. | Machinery, equipment, buildings, and cash. |
Both human capital and physical capital are important for businesses and contribute to the production process.
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