Capital: Meaning, Classification and Characteristics Objective Type Questions (1 Mark)

Question 1.
All capital is the product of (UP 2017)
(a) Investment
(b) Saving
(c) Production
(d) None of these
Answer:
(b) Saving

Question 2.
By the term capital formation we mean:
(a) Fixed Assets
(b) Capital Formation
(c) Investment
(d) None of these
Answer:
(b) Capital Formation

Question 3.
……… and forced savings constitute the two types of savings.
(a) Voluntary
(b) Non-voluntary
(c) Either (a) or (b)
(d) none of these
Answer:
(a) Voluntary

Question 4.
…….. and ………. are essential for making additions to the stock of capital.
(a) Saving, Capital
(b) Capital, Investment
(c) Saving, Investment
(d) None of these
Answer:
(c) Saving, Investment

Question 5.
Under-developed countries are characterised by ……….. rate of capital formation.
(a) High
(b) Low
(c) Either (a) or (b)
(d) None of these
Answer:
(b) Low

Capital: Meaning, Classification and Characteristics Definite Answer Type Questions (1 Mark)

Question 1.
Give the name of any two kinds of capital.
Answer:
Fixed and circulating capital.

Question 2.
Which term is used in the service of money or wealth or property?
Answer:
Capital.

Question 3.
What are the primary factors of production?
Answer:
Land and Labour.

Capital: Meaning, Classification and Characteristics Very Short Answer Type Questions (2 Marks)

Question 1.
Define Capital.
Answer:
According to Marshall, “Capital consists of those kinds of wealth other than free gifts and nature which yield income.”
According to Thomas, “Capital is that part of the wealth of individuals and communities, other than land, which is used in the production of further wealth.”

Question 2.
Give any two functions of capital.
Answer:
The following are the functions of capital:

• Capital makes the provision of tools and implements to workers for productive purposes.
• A part of capital is spent on purchasing raw materials.

Capital: Meaning, Classification and Characteristics Short Answer Type Questions (4 Marks)

Question 1.
What is the importance of capital in production?
Answer:
Capital has been a very important factor of production even in earlier stages of human development. In the hunting, stage man used some implements to kill wild animals for food. These implements were his capital. Since then capital in some form or the other has played a significant role in the economic development of society. Under capitalism, capital is most significant. It is equally important under communism. Though capital is not a primary factor of production yet its importance is as great as that of any primary factor of production such as land as labour.

Question 2.
What do you mean by Gross Capital Formation and Net Capital Formation? (UP 2016)
Answer:
Every producing unit has to make provisions for the depreciation of the plant and machinery. So, it keeps aside a part of its profits for replacing the warm out machinery and plant. But it sometimes keeps another part of its income away for buying new machinery and equipment when it feels a need to expand itself. So every producing unit not only keeps its capital intact but it tries to expand its productive capacity through making additions to further capital in future. So, the gross capital formation induces two things:

• Maintaining capital intact.
• Making further additions to capital equipment to expand the volume of production.

While net capital formation includes only one thing, i.e., making further Addition to capital equipment.

Question 3.
Make out the main differences between Fixed and Circulating Capital. (UP 2009, 17)
Answer:
Difference between Fixed Capital and Circulating Capital:
Fixed Capital: Fixed Capital exists in a durable shape, renders continuous service for many years and its return is spread over a greater length of time. Fixed Capital includes those goods which are used again and again for further production. Their utility does not get exhausted in a single-use. For example, machinery is used in a factory for several years until it becomes useless. Similarly, factory premises are fixed capital because they are used for several years. Examples of fixed capital are machinery, plant, tools, implements, building and other durable goods.

Circulating Capital: Circulating capital refers to those goods which can be used only once in production or those goods which cannot be used in production over and over again. They are single-use producer goods. Examples of circulating capital are raw materials, fuel and goods in process, money paid on wages to workers etc.

Question 4.
Draw a clear line of demarcation between Capital and Wealth. Mention the point of differences between Land and Capital. (UP 2009)
Answer:
Difference between Capital and Wealth: Capital is that part of the wealth that is used for the production of further wealth. Thus, “all wealth is not capital, though all capital is wealth.”

Professor Benham and Fisher do not find any difference between wealth and capital because both are used for production and consumption. According to these scholars, all wealth is capital because the direct effect of goods is on production of wealth. The only difference lies in use. If, for example, a car is bought for excursions and enjoyment, it is not capital, but if it is bought for doing business, it is capital.
Differences between Land and Capital

Land	Capital
1. Land is a free gift of nature.	1. Capital is formed through human efforts, i.e., it is a ‘produced’ agent of production.
2. Land lacks mobility.	2. Capital is fairly mobile.
3. The supply of land is fixed and limited in the area. In the event of fluctuations in rent, its supply cannot be increased or withdrawn.	3. Supply of capital can be increased or decreased with human efforts.
4. Rent of land varies.	4. Income from capital is more or less uniform.
5. Land is a permanent factor of production and indestructible. Land does not depreciate or wear out.	5. Capital is perishable and becomes completely worn out and the same needs to be replaced.

Question 5.
Distinguish between wealth and capital. Explain the importance of capital in production. (UP 2019)
Answer:
Difference between capital and wealth
Capital is a part of wealth which is used for the production of further wealth. Thus, “All wealth is not capital, Though all capital is wealth”.

Professor Benham and Fisher do not find any difference between wealth and capital because both are used for production and consumption. According to these scholars, all wealth is capital because the direct effect of goods is on production of wealth. The only difference lies in use if for example. A car is bought for excursions and enjoyment. It is not capital but if it is bought for doing business it is capital.

Importance of capital is production in the modern large scale production system. Capital is a very important factor of production, so important that other factors of production manpower resources of a country cannot be utilised without capital nor can the natural resources be exploited for the use of man.

Capital has been a very important factor of production even in the earlier stage of human development in the haunting stage man used some implements to kill wild animals for food. These implements were his capital. Since then capital in some form or the other has played a significant role in the economic development of society. Under capitalism capital is most significant it is equally important under communism. Though capital is not a primary factor of production. Yet its importance is as great as that of any primary factor of production such as land or labour.

Capital: Meaning, Classification and Characteristics Long Answer Type Questions (8 Marks)

Question 1.
Define Capital and write its characteristics.
Or
Clarify the meaning of Capital. Describe the importance of capital in the business. (UP 2012)
Answer:
Meaning of Capital: Capital generally means money, but in Economics, the term capital means that part of man-made wealth which is used for further production of wealth. In the words of Marshall, “Capital consists of all those kinds of wealth other than free gifts of nature, which yield income.”

Characteristics of Capital: The main characteristics of capital are as follows:
1. Capital is man-made factor of production. Under capital, only man-made factors can be included such as machines, buildings etc. On the contrary, the gifts from nature such as land, climate etc. cannot be considered as capital.

2. All wealth cannot be counted as capital, but only that part of the wealth which is helpful in further production is counted as capital.

3. No production is possible without capital. But capital does not produce anything by itself. Production is carried out with the help of capital and it is rightly said that capital is an inactive factor of production.

4. The capital involves the element of time. The capital renders its services for a period of time. This is the reason why the payment of capital is measured in terms of a particular rate, per cent and per year.

5. The capital is subjected to depreciation. The capital used in the form of machinery due to constant use suffers wear and tear. Therefore, this needs to be replaced.

6. Capital possesses the quality of mobility. Capital is the most mobile factor of production. The capitalist can carry his capital anywhere he likes without any difficulty.

7. Capital has the characteristics of elasticity. Supply of capital can be increased or decreased depending upon the situation.

8. Production is possible only due to the use of capital. The application of capital increases the efficiency of labour and productive power of all the factors of production with which it is combined and used.

UP Board Solutions for Class 10 Commerce