An introduction to human and physical capital.

Human capital is an important factor in production, and employing individuals with the right education, experience, skills and training, can improve efficiency, productivity and profitability


 Human CapitalPhysical Capital
1They are human assetsThey cannot control themselves except with the aid of human beings
2They are assets which have been manufactured and used in production i.e. they are tangible assets.Human capital is controlled by themselves (or by humans)
3They are non-human assets i.e. they are made by manThey cannot control themselves except by the aid of human beings
4They are skills, training, experience, education, knowledge, and competencies contributed by humans to a business i.e. they are intangible assets.They are related to land, plants, machinery and motor vehicles
5They are labour-related assetsThey can appreciate this through education training and experience
6They can depreciate through bad health and poor trainingThey do not appreciate their value
7They can depreciate due to ageing and not to bad healthThey can be acquired through direct purchases or by lease.
8The reward for human capital is wages and salaries.The reward for physical capital is interest
9It has no feelings. Its consent do not need to be sought before it can be used in production.It is acquired through formal education, job training, on-the-job learning and life experiences.


Human capital refers to the skills, training, experience, education, knowledge, technical know-how, and competencies contributed by humans to a business.

In other words, human capital can be referred to as the value that is added to a company by an employee, which can be measured by the employee’s skills and competencies.

Human capital is an important factor in production, and employing individuals with the right education, experience, skills and training, can improve efficiency, productivity and profitability.


  • Define human capital.
  • Explain the factors affecting the efficiency of human capital.
  • Distinguish clearly between human and physical capital.
  • Define brain drain as it affects human and physical capital.

Companies can invest in their human capital by offering training and education facilities to their workers.

Training and developing employees can help them develop a broader set of skills and abilities and reduce the cost of hiring additional employees with the necessary skills.

One thing that must be kept in mind is that humans are not equal to one another and that human capital can be developed in many ways to obtain the highest economic value for the firm.


Physical capital refers to assets which themselves have been manufactured and are used for the production of other goods and services.

in a broader term, physical capital refers to all non-human assets created by humans and used in the production and manufacturing process.

Examples of physical capital include machinery and equipment used directly in the production process.

Buildings are also classic as physical capital, as long as they are used in business operations.

 Manufacturing plants obi contain all production equipment and facilities, Warehouses that contain finished or work-in-progress products, and even buildings used for administration, accounting, sales etc. are referred to as physical capital.

Vehicles are aim considered physical capital, whether they are used for internal purposes or are used to transport goods to their final retail destination,, as long as the vehicle is used in business operations it becomes physical capital.

An important point to note is ran physical and human capital must go hand in for a business to run its operations successfully;

The right human capital can enhance the value of physical capital and influence the right physical capital, human capital cannot contribute to its full extent.

Human capital and physical are both types of capital resources that are essential to the smooth running of any business.\\

  • Human capital is mobile: Human capital is mobile both geographically (from one place to another) and occupationally (from one job to the other)
  • Human capital has feelings: Human capital cannot be used anyhow as its consent must be sought before it is used in production
  • Human capital is skilful: Human capital becomes skilful through education and training.
  • It is a human factor: Human capital is a human factor hence its supply can easily be controlled.
  • It requires motivation: For human capital to perform efficiently and increase its productivity, it must be motivated in one way or the other.
  • Human capital is not predictable:  Human capital as a factor of production cannot be easily predicted.

Human capital is not fixed: The supply of human capital unlike not fixed as it varies in quantity and quality.

  • Human capital is perishable: Knowledge can diminish over time as a result of continued unemployment, under-employment, age and death.
  • Human capital controls other factor her factors of production to make them more meaningful to society
  • Human capital has initiative: Human capital can act on its own initiative.


As an intangible asset, human capital is the workforce a company employs.

Human capital is a combination of employee competencies and their commitment to the organization for which g they work.

According to University of Chicago professor, Gary S. Becker, economists may refer to a workforce as “human capital” because their combination of skills, health, values and knowledge sire regarded as an asset.

The following factors affect the efficiency of human capital:

  • Education: One of the most important factors in the development of human capital is education. When an individual obtains training or acquires knowledge in a formal education set-up, that person is expected to perform very well in the place of work.
  • Experience: Experience is very important for human capital to be efficient. Highly experienced workers are in a position to get jobs than the person without experience. It is often said that one can not buy experience. It can only be acquired over a period of time from where the person has previously worked.

Competence: The abilities an individual has and her capability to expand upon them can help her create a positive in human capital. For example, a doctor can gain a level of human capital over training and education but then develop a greater gain in human cap\’ over time with continued practice experience.

Personal attributes: Personal attribute is a factor that can affect the efficiency of human capital. The zeal at which a person is willing to learn or acquire knowledge can help such a person be efficient in the place of work.

Social attributes: The social attributes include the condition of work incentives, etc. that the company may offer. Better place of work or g incentives for workers tends to increase the efficiency of human capital.

  • Increased innovation: The ability of an employee to increase innovation in an organisation goes a long way in the efficiency of human capital.
  • Skills: Possession of special skills in a job is important for human capital. Acquisition of special skills is a boost to human capital development.
  • Training: Even though a person may not have acquired a formal education in order to develop human capital, training in some other forms can help such a person to develop or acquire human capital.
  • Health status: Good health status promotes better human capital whereas poor health status does not.


Management accounting is often concerned with die questions of how to model human beings as capital assets. Human capital is very important for an organization’s success.

The concept of human capital has relatively more importance in surplus countries. These counties are naturally endowed with more labour due to the high birth rate under the given climatic conditions.

The surplus labour in these countries is the human resource available in more abundance than the tangible capital resource. The human resource can be transformed into human capital with effective inputs of education, health and moral values.

The transformation of raw human resources into highly productive human resources with these inputs is the process of Human Capital Formation.

The problem of scarcity of tangible capital in labour-surplus countries can be resolved by accelerating the rate of human capital formation with both private and public investment in the education and health sectors of their national economies.

Tangible financial capital is an effective instrument for promoting the economic growth of the nation.

The intangible human capital, on the other hand, is an instrument for promoting the comprehensive development of the nation because human capital is directly related to human development, and when there is human development, the qualitative and quantitative progress of the nation is inevitable.

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