Which of the following best defines physical capital?

• A. Land and natural resources used in production.
• B. Tools, machines, and buildings used to produce goods.
• C. Money kept as cash reserves.
• D. Human knowledge and skills.

Answer: (B)

Physical capital refers to the tangible, man-made assets that help produce goods and services. These are the tools, machines, and buildings that workers and firms use over time to boost output and efficiency. They are not the natural resources being used (those are land and inputs from nature), nor are they money kept in reserve (financial capital), nor the knowledge and skills people have (human capital). An example is a factory filled with machines and equipment—the kind of durable assets that enable production much more than just labor alone. That’s why the description of tools, machines, and buildings used to produce goods best defines physical capital.