Question

Define and distinguish between physical capital and human capital. We can invest in one or both. Which, in your opinion, is the better investment? Please explain, in reasonable detail, why you think so.

Answer 1

Physical capital refers to the factor of production which includes tangible assets like plants, machinery, building, computers, etc.

Human capital refers to skills, knowledge, ideas, expertise, etc. of workers which facilitate the production process.

We can invest in both physical and human capital. Both are essential to economic growth. Physical capital alone or human capital alone cannot condition the production process. Physical capital needs human expertise, knowledge, and experience for operation. Also, human capital needs physical capital to conduct production process. In other words, both physical and human capital is important for economic growth and they complement each other.

Both these capital are equally important and one is not better than the other. If we focus on only physical capital and not on human capital, marginal productivity will fall after a certain level. Similarly, If we focus on only human capital and not on physical capital, marginal productivity will also fall after a certain level. In order to ensure higher production and output, we need to invest in both so that both can complement each other.