Physical capitals and financial capital Essay Example | Topics and Well Written Essays - 1750 words

Physical capitals and financial capital - Essay Example nited States Decrease Increase - Exchange rate changes Increase Increase Note: In the red above, an increase in wealth makes AD increase; a decrease in wealth makes AD decrease. This is how you should format each table. SECTION TWO a) Physical capital differs from financial capital in a number of ways. By definition, physical capital is an already-manufactured tangible asset that is used in production. On the other hand, financial capital refers to equity that is used by business owners to purchase resources that are required in producing goods and services. Different from financial capital, physical capital can be acquired by building it, purchasing it or renting it. Financial capital can be acquired through borrowing and selling of ownership stake within an organization. Examples of financial capital include bank loan and corporate bonds, while that of physical capital include motor vehicle and machinery. b) The distinction between gross investment and net investment is based on ca pital depreciation. Gross investment refers to total amount of investment that does not incorporate any depreciation while net investment refers to investment that incorporates depreciation. Therefore net investment can simply be defined as gross investment less capital depreciation. The difference between gross investment and capital investment can be illustrated mathematically as follows. Net Investment = Gross Investment – Depreciation Gross investment = Net investment + Depreciation c) The three main types of markets for financial capital include Loan markets Stock market Bond market d) The price of a financial asset and interest rate has an inverse relationship. The prices of financial asset do always increase with decrease in interest rate. This can be explained well by considering the relationship of a financial asset such as bond with its interest rate. For example, let’s assume company X issues a new bond that has a face value of $1000 with an interest rate of 7%. If in the same year the general interest rates increases to about 8%, buyers will not be willing to pay the $1000 face value with an interest rate of 7%. Therefore, in order to sell the bond, company X will have to issue its bond at a lower price, that is, at a discount that will enable the new bond holder to generate an 8% interest. In this scenario, the price of the bond will fall to approximately $ 875. Similarly, if the interest rate falls to 6%, the price of the bond will be much higher than $1000. The bond will be valued at $1166. This is illustrated in the diagram below. e) When firms are involving in decisions to make investment, they normally consider a number of