Capital intensity is what a concept is?

There are two ways to assess the success of any economic entity: its growth and production efficiency. And the latter is often much more correct. The efficiency of production allows us to estimate the costs of economic growth. And he talks about the quality of the latter. Capital intensity is only one of the indicators of production efficiency. Therefore, you can not focus exclusively on him. Important is the calculation and indicators such as:

• Material return.
• Productivity of labor.
• Energy intensity.
• Capital productivity.
• Labor intensity.
• Material consumption.
• Energy efficiency.

However, without calculating the capital intensity, it is indispensable. Therefore, this article will be devoted to it.

The concept of

In short, the capital intensity is the ratio of the values of fixed capital and output. It describes the costs per unit of goods produced. Often this indicator is compared with the laboriousness. After calculating both indicators, you can tell what the product is. It means the capital- or labor-intensive production. It should be noted that the use of machinery, equipment and tools always contributes to the improvement of labor efficiency. As a result, the capital intensity increases. And this increases the productivity of labor. Therefore, in the long run, countries whose production is more capital-intensive often have a higher standard of living.

Representatives of individual economic directions treated the concept differently. The Austrian school believes that the capital intensity of the industry depends on the method of production and consumer demand. Solow argued that growth is not ensured by the amount of capital and labor, but by technological progress. Ross spoke about the positive impact of investment in GDP.

Formula

We introduce the notation. Among them:

• OS - the value of fixed capital.
• K - indicator of capital intensity.
• PP - the cost of manufactured products.

Thus, K = OC / PP. The opposite is the return on capital. It is equal to the PP / OC.

To characterize the country's economy

The coefficient of capital intensity is used not only to characterize individual enterprises, but also entire industries. Its high values mean that a large material and technical base is used in this sector. For example, this is characteristic of heavy metallurgy. The development of this industry is impossible without huge production capacity, and therefore requires a huge amount of investment in their purchase. Therefore, heavy metallurgy is an extremely capital-intensive industry. It is with its development in the late 19th century that the appearance of this concept is connected. Examples of capital-intensive industries are also:

• Railways.
• Mining.
• Telecommunications.
• Chemical industry.
• Power engineering.
• Air transportation.

But there are areas that do not require a huge production base. However, their capital intensity ratio can also be quite high due to the considerable value of the goods sold.

Trends

Capital intensity is a concept that emerged in the era of the industrial boom. During the 20th century, many countries intensively increased their production capacities. This allowed to significantly increase the number of products sold. However, to date, the most developed countries of the world are at the stage of transition to a post-industrial society. The sphere of services comes to the fore. However, the coefficient of capital intensity can also be used to characterize it. And it is calculated by the same formula as for the production sphere. The only difference is that we will not take the cost of goods sold, but services.