Capital is more important than labor for economic growth because capital can easily be translated into goods and services. These goods and services are what drive the economy forward. Labor, on the other hand, is not as easy to translate into current production.
Capital means many things to many people in the business world. In simplest terms. Capital is money, equipment, and other assets that can be used to produce goods and services. Labor refers to the work done by humans. The labor market includes everyone from high-salaried managers today laborers paid by the hour.
While labor is necessary for production, labor alone does not drive the economy forward. If a company has all the work it needs for a particular business and nothing more. It will produce only what its existing laborer force can make. However, if these laborers are equipped with tools (capital), they can create much more output to drive the economy forward.
An example of this might be helpful. Imagine an auto parts factory in which all employees are experienced machinists capable of producing high-quality engine parts. However, the factory only has a handful of old machines to do this work. These workers can pay only a limited amount of goods. If they were supplied with modern equipment (capital), they would be able to make many more parts in the same amount of time.
This is because, in simple terms, capital can be used to create economic activity and growth. Labor cannot be so easily translated into current production. Once you pay wages to a laborer – giving them money. That money typically must work again before it becomes part of the economy. The only way the laborer gets it back is if he spends his wages buying something. A car from a dealer, clothes from a retail store. The retailer will then recycle this income by purchasing goods from other companies. Thus creating an amount of economic activity that exceeds what was paid in wages. In other words, labor alone does not drive the economy forward. Instead, money earned through labor must be spent again before doing the economic activity.
However, when a company has more capital than it needs, this extra money and equipment. Can be used to create more goods and services that then become part of the economy. Unlike the laborer’s paycheck that must cycle through the economy again before it. Impacts production (in other words, before driving economic growth). Surplus capital can be invested in new technologies or manufacturing processes. To create products that improve productivity. The more capital a company has, the more value it can add in this way — and thus, the faster economic growth can occur.
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