Which one of the following terms denotes the inputs in terms of tools, machines, buildings, raw materials and money in hand required at any stage of production ?
- (a)Fixed capital
- (b)Working capital
- (c)Physical capital
- (d)Human capital
Correct — C, Physical capital. Read the stem's own list and the answer falls out. Tools, machines and buildings are durable items that survive many rounds of production; raw materials and money in hand are used up within a single round. The first set is fixed capital, the second is working capital, and the term that covers both is physical capital — the variety of inputs required at every stage during production. Because the question deliberately names items from each sub-category, neither sub-category on its own can be the answer; only the umbrella term fits everything listed.
- (a)Fixed capital — Fixed capital accounts for only half the list. It covers the tools, machines and buildings, which can be used in production over many years, but not the raw materials and cash that are consumed in one production cycle.
- (b)Working capital — Working capital is the other half — raw materials and money in hand, exhausted or converted within a single cycle of production. It leaves out the durable tools, machines and buildings that the stem also lists.
- (d)Human capital — Human capital is the stock of skill, education, training and health embodied in people. It is a real and important input, but none of the items named in the stem is a person or a skill.
Production needs four kinds of input in the standard textbook scheme: land and other natural resources, labour, physical capital and enterprise or human capital. Physical capital splits in two. Fixed capital is made up of durable goods — tools, machines, buildings, generators — that yield services over many production cycles. Working capital is raw materials and cash in hand, which are used up or turned over each cycle and must be replenished before the next one can begin.
This item can be answered without recalling a definition at all, simply by matching the stem's list against the options. Once you notice that the list straddles two categories, any option naming one of those categories must be too narrow. The distinction being tested has real bite. A weaver's loom is fixed capital and the yarn on it is working capital; a farmer's plough is fixed capital and the diesel in the pump set is working capital. The rule is not durability in the abstract but whether the item survives the production cycle in which it is used. Note also the phrase money in hand — cash held to buy inputs and pay wages counts as working capital, which is why a business with full order books can still stall for want of it.
- Physical capital is the variety of inputs required at every stage during production, and it has two components.
- Fixed capital consists of durable items such as tools, machines and buildings, used over many production cycles.
- Working capital consists of raw materials and money in hand, used up within a single production cycle.
- Human capital is the stock of skill, education, training and health embodied in workers, and is a separate category from physical capital.
- The test for the two sub-categories is whether the item survives the production cycle, not simply how long it lasts.
The stem names items from both sub-categories, so only the umbrella term can cover everything it lists.
- Choosing fixed or working capital when the stem has deliberately listed items from both.
- Classing raw materials as fixed capital because a large stock of them looks like an asset.
- Forgetting that money in hand is working capital rather than a separate category.
As a definition-to-term item, or as a pair-matching question sorting named items into fixed and working capital.
With reference to physical capital in Indian economy, consider the following pairs: Items — Category 1. Farmer's plough — Working capital 2. Computer — Fixed capital 3. Yarn used by the weaver — Fixed capital 4. Petrol — Working capital How many of the above pairs are correctly matched?
- (a) Only one
- (b) Only two
- (c) Only three
- (d) All four
Answer(b) Only two
The same split, tested item by item. A plough is fixed and yarn is working, so those two pairs are reversed; a computer is fixed and petrol is working, so those two are right — which is exactly the survives-the-cycle test this question is built on.
- practice — not a real PYQ
Which one of the following would be classified as working capital for a weaver?
- (a)The handloom
- (b)The yarn to be woven
- (c)The workshed
- (d)The weaver's skill
Answer(b) The yarn to be woven — it is consumed in a single production cycle, while the loom and the workshed are fixed capital and skill is human capital.
- practice — not a real PYQ
The stock of skill, education, training and health embodied in workers is referred to as
- (a)physical capital
- (b)fixed capital
- (c)human capital
- (d)working capital
Answer(c) Human capital — physical capital covers the tangible inputs, of which fixed and working capital are the two parts.