What are human capital, financial capital, and physical capital, and how are they different?

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Financial capital refers to the equity or net assets in a business. It is the sum of money quoted when we say how much a business is worth, including saved-up wealth and the total cash value of all assets.

Physical capital refers to the tangible objects that a company uses in its business, including buildings, machinery, and equipment. The equipment used in administration and ancillary activities, such as computers, telephones, and office furniture, is all part of a business's physical capital.

Linked to these terms are the differing concepts of capital which economists or accountants may use in describing a business or preparing financial reports. A financial concept of capital relies on assets or equity in valuing a business, whereas a physical concept focuses on productivity (such as the business's daily output).

Human capital differs markedly from other types of capital and refers to the abilities of employees which allow them to perform their roles within the business and generate income. This includes education, training, and unique skills, as well as the habits and personalities of the workers. Human capital is unique in that it is difficult to quantify. It is clearly possible to form an estimate of how much it takes to train a lawyer or an accountant, for instance, but much more difficult to put a cash value on the skills acquired by a lawyer who has been practicing for twenty years, as opposed to one who is newly qualified. It is similarly hard to say what value should be assigned to characteristics such as conscientiousness and motivation, which form part of human capital. However, the amount that employees are paid and the billing rates of professionals provide an approximate measure of the value of their human capital.

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