Question

Why land is called fixed capital?Explain.

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Answer 1

Answer:

What Is Fixed Capital?

Fixed capital includes the assets and capital investments—such as property, plant, and equipment (PP&E)—that are needed to start up and conduct business, even at a minimal stage. These assets are considered fixed in that they are not consumed or destroyed during the actual production of a good or service but have a reusable value. Fixed-capital investments are typically depreciated on the company's accounting statements over a long period of time—up to 20 years or more.

Fixed capital can be contrasted with variable capital, the cost and level of which change over time and with the scale of a company's output. For instance, machinery used in production would be considered fixed capital, while human labor would be a component of variable capital.

The concept of fixed capital was first introduced in the 18th century by the political economist David Ricardo. For Ricardo, fixed capital referred to any kind of real or physical asset that was consumed in the production of a product. This was opposed to Ricardo's idea of circulating capital, such as raw materials, operating expenses, and labor. In Marxian economics, fixed capital is closely related to the concept of constant capital.

Explaining Fixed Capital

Serving as the mechanism upon which production activities take place, fixed capital includes tangible items, such as equipment and facilities, which are needed for business operations. Fixed capital does not include materials used in the actual composition of the good being produced. Investments in fixed capital include the addition of new tools and equipment, as well as real estate needed to create and house the goods being produced. A fixed asset may be resold and reused at any time before its useful life is over, which often happens with vehicles and airplanes.