What is economic capital and what are the examples of it?
Economic capital is the amount of capital that a company needs to ensure it stays solvent. It’s a measure of risk in terms of capital and it’s usually calculated internally by the company.
It is the term used to describe the amount of monetary or exchange value an individual has.
French sociologist Pierre Bourdieu describes having cultural and social capital as the primary factor to attain economic capital. They can be leveraged to secure lucrative jobs as well as secure business deals.
What Is Economic Capital?
Economic capital is the amount of capital that a company needs to ensure it stays solvent. It’s a measure of risk in terms of capital and it’s usually calculated internally by the company.
Understanding Economic Capital
Economic capital measures risks with economic realities instead of accounting and regulatory rules, which sometimes can be confusing. It is considered to be a more realistic representation of a company’s solvency.
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Economic Capital Examples
Economic capital examples are assets owned by individuals or companies and they include;
Money
According to Investopedia, money is any item or medium of exchange that is generally accepted by the public for the payment of goods and services. It can also be used to repay loans.
Money is a source several economies rely on to facilitate transactions as well as strengthen financial growth.
Money makes the world go “round” is a common phrase everyone agrees with. Businesses function and maintain their status with the inflow of money.
Economists in the 21st century usually list three functions of money, which include the medium of exchange, a unit of account, and a store of value.
Money is a unit of account, a socially accepted standard unit with which items are valued and priced.
Its value is a function of social conventions and for money to function as a legal tender, it must be declared by a government or regulatory body as an acceptable form of payment.
Generally, there are several properties money must possess to fulfil its function. They include durability, fungibility, portability, being limited in supply, acceptability, and durability.
Personal Property
Unlike real estate, personal property is valuable items that can be moved to locations.
Personal property can be moved to a different location where it’s needed. Movable personal property is sold and then moved. For example, livestock is not sold with the land, so that is a typical example of personal property.
Modern economists classify personal property in several ways.
Intangible personal property is personal property that cannot be moved physically. Common examples of intangible personal property include services, securities, etc.
On the other hand, tangible personal property is personal property that can be moved. Examples of tangible personal properties include jewellery, clothing, furniture, car, household items, etc.
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Equities
Capital stock according to Investopedia, is the amount of common and preferred shares that a corporation or company is authorized to issue, according to its charter.
Owing capital stocks means that a shareholder gets a fraction of a corporation or company’s earnings. Capital stocks can be purchased and sold privately or on stock exchanges.
Buying and selling of stocks are usually regulated by the government to prevent any fraudulent activity. Government involvement also helps protect investors.
A company may declare various classes of shares with each having separate ownership rules. Generally, ownership of shares is documented through stock certificates to specify the number of shares owned by a single stockholder.
Common stocks and preferred stocks are the most common types of stocks.
Commodities
A commodity according to Investopedia, is a basic good used in commerce that is interchangeable with other goods.
The price of a particular commodity is determined as a function of its entire market. Most commodities are either resources, raw materials, or products.
Commodities are divided into soft, hard, and energy commodities.
Soft commodities are grown goods such as corn, cereal, wheat, rice, etc.
Hard commodities are gold, silver, iron, oil, and bronze, while energy commodities include natural gas, coal, and electricity.
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Real Estate
Economic capital examples also include real estate.
Real estate is defined according to Investopedia, as the land and any permanent structures attached to the land regardless of whether there are natural or man-made.
Real estate differs from personal property, which can is not permanently attached to the land. For example, vehicles, jewellery, furniture, boats, etc.
In general, there are four types of real estate which are residential, commercial, industrial, and vacant.
Residential real estate comprises single-family homes, duplexes, villas, townhouses, vacation homes, etc. Industrial real estate comprises manufacturing buildings and warehouses.
Commercial real estate comprises shopping centres, educational buildings and warehouses, while vacant real estate includes lands like working farms and ranches.
Bonds
According to Forbes, bonds are investment securities where an investor lends money to a company or government for a specific period of time in exchange for regular investment payments.
The investor’s money must be returned by the bond issuer once the bond matures.
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Cryptocurrencies
A cryptocurrency is a digital or virtual currency designed as a medium of exchange to be used through a computer network. It’s secured by cryptography, making it almost impossible to counterfeit.
Cryptocurrencies are independent of governments or banks.
Arts Pieces
A piece of art is also a form of social capital as well as a form of economic capital.
A piece of art can be purchased as it is a form of investment. It can be bought for a price and sold for a higher amount.
Business Assets
Owning a huge business means having several assets. Individuals who own many assets will likely need to declare their assets as economic capital to the government annually.
Futures
According to Investopedia, futures are derivative financial contracts which obligate parties to purchase or sell an asset at a predetermined future date ad price.
The buyer must purchase and the seller must sell the asset at the fixed price no matter what the current market price is at the expiration date.
Conclusion
Economic capital is a form of capital that is different from social, cultural, and natural capital because it reflects tangible value which can be transferred in a financial transaction.
It’s the amount of capital that a corporation needs to ensure it remains solvent.
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References
- Helpfulprofessor.com: 10 Economic Capital Examples
- Investopedia: What Is Economic Capital (EC)? How to Calculate and Example
- Study.com: Capital Characteristics & Examples | What is Capital in Economics?
- Inheritance and Transmission in the Sociology of Pierre Bourdieu Anne Jourdain, Sidonie Naulin