There are two ways to assess the success of any business entity: by increasing its performance and production efficiency. And the latter is often much more correct. Production efficiency makes it possible to evaluate 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 solely on him. The calculation of indicators such as:
- Material output.
- Labor productivity.
- Energy intensity.
- Return on capital.
- Labor input.
- Material consumption.
- Energy efficiency.
However, the calculation of capital intensity is indispensable. Therefore, this article will be devoted to it.
The concept
In short, capital intensity is the ratio of the costs of fixed capital to manufactured products. It characterizes the costs per unit of goods released. Often this indicator is compared with the complexity. After calculating both indicators, we can say what the product is. This refers to the capital- or labor-intensive production of it.
It should be noted that the use of machinery, equipment and tools always contributes to increased labor efficiency. As a result, capital intensity increases. And it increases labor productivity. Therefore, in the long run, countries whose production is more capital intensive often have a higher standard of living.
Representatives of certain economic areas examined this concept in different ways. The Austrian school believes that the capital intensity of the industry depends on the method of production and consumer demand. Solow, however, argued that growth was not provided 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 cost of fixed capital.
- K is an indicator of capital intensity.
- PP - the cost of production.
Thus, K = OS / PP. The return indicator is return on assets. It is equal to PP / OS.
To characterize the country's economy
The capital intensity ratio 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 capacities, and therefore requires tremendous investment in their purchase. Therefore, heavy metallurgy is an extremely capital-intensive industry. It is with its development at the end of the 19th century that the appearance of this concept is connected. Examples of capital-intensive industries are also:
- Railways
- Mining.
- Telecommunications.
- Chemical industry.
- Power industry.
- 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 cost of goods sold.
Trends
Capital intensity is a concept that appeared in the era of the industrial boom. Over the course of the 20th century, many countries intensively increased their production capacities. This has significantly increased the number of products sold. However, today the most developed countries in the world are at the stage of transition to a post-industrial society. The service sector comes to the fore. However, the coefficient of capital intensity can be used to characterize it. And it is calculated according to the same formula as for the manufacturing sector. The only difference will be that we will take not the cost of goods sold, but services.