It then needs to borrow. Two components make up the financial architecture of BRICS: the New Development Bank (NDB) and the Contingent Reserve Arrangement (CRA). When a government spends more than it collects in taxes, it runs a budget deficit. Property Ownership & Conveyance Issues in Washington, Zeroes, Roots & X-Intercepts: Definitions & Properties, Manufactured Housing Rules in New Hampshire, Quiz & Worksheet - Analyzing The Furnished Room, Quiz & Worksheet - Difference Between Gangrene & Necrosis, Quiz & Worksheet - A Rose for Emily Chronological Order, Quiz & Worksheet - Nurse Ratched Character Analysis & Symbolism, Flashcards - Real Estate Marketing Basics, Flashcards - Promotional Marketing in Real Estate, Anti-Bullying Guide | Stop Bullying in Schools, What is Common Core? Governmental institutions in fact play a smaller role in the United States in higher education than at lower levels. There are many more ways in which the government can play an active role in promoting economic growth; we explore them in other chapters and in particular in Macroeconomic Policy Around the World. A. credit-by-exam regardless of age or education level. Yet profits are determined by the quantity of capital used in production; therefore, the quantity of capital cannot be determined by the amount of profit generated without circular reasoning. Each month contains 20 working days, each working day allows for two 10-hour shifts. Jon has taught Economics and Finance and has an MBA in Finance. The ability to produce these goods and services depends on several factors including physical capital, human capital, natural resources, and technology (Mankiw, 2012). There are times when markets fail to allocate capital or technology in a manner that provides the greatest benefit for society as a whole. flashcard sets, {{courseNav.course.topics.length}} chapters | Our editors will review what you’ve submitted and determine whether to revise the article. | {{course.flashcardSetCount}} imaginable degree, area of All other trademarks and copyrights are the property of their respective owners. If a farmer can afford to invest capital, yields will rise and can create greater profits which can be used for more investment. Let us know if you have suggestions to improve this article (requires login). You can test out of the But the growth of this factor may have other implications, as well. But, why is it important? You will increase capacity as long as A) the expected marginal product of capital is positive. lessons in math, English, science, history, and more. Log in here for access. Once cooked, workers place it into a machine that grinds it down until it becomes fine corn flour. Investment in education is considered as one of the main sources of human capital. To learn more, visit our Earning Credit Page. A capital market can be either a primary market or a secondary market.In primary market, new stock or bond issues are sold to investors, often via a mechanism known as underwriting.The main entities seeking to raise long-term funds on the primary capital markets are governments (which may be municipal, local or national) and business enterprises (companies). Hula hoop fabricators cost $100 each. It includes things like buildings, machinery, equipment and computers. Advantages of Self-Paced Distance Learning, Advantages of Distance Learning Compared to Face-to-Face Learning, Top 50 K-12 School Districts for Teachers in Georgia, Those Winter Sundays: Theme, Tone & Imagery. (iv) What role can the government play in human capital formation in India? These raw materials are then carried inside the building, where they are placed in various types of machines. Try refreshing the page, or contact customer support. HHHHC expects to produce the following number of hoops each year f, Based on the definitions of a 'physical capital change' and 'technological change,' determine whether the following scenarios can be described by one of these two terms. Capital plays an essential role in economic growth and is the central object of investigation in the second equation of Solow’s model, capital accumulation. If a government wishes to raise the productivity and standard of living of its citizens, it should pursue policies that: encourage saving and investment. The government's direct role in the production of physical capital is primarily focused on a. Following this lesson, you will be able to: To unlock this lesson you must be a Study.com Member. 42. Log in or sign up to add this lesson to a Custom Course. First is the role of government in providing a stable environment for investment, including the role the government plays in the creation of markets. Their institutionalisation has been the BRICS’ most-notable achievement, marking a shift from rhetoric to results and offering credible alternatives to the Atlantic system of global governance. Answer to: 1. 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B) the expected marginal product, The catch-up effect Consider the economies of Blahnik and Gribinez, both of which produce gobs of goo using only tools and workers. Not sure what college you want to attend yet? 16 chapters | Anyone can earn Economic production functions, which model production processes by using factor inputs, assume that definition. first two years of college and save thousands off your degree. Physical capital is one of the three main factors of production in economic theory. in production, can ll a substantial part of the apparent gap left by weak physical capital investment. Once this batch is placed in the oven, cooled and placed in bags, this production process has turned it into a crispy, crunchy, corny creation that consumers constantly crave. https://www.britannica.com/topic/physical-capital, Organisation for Economic Co-operation and Development. Sciences, Culinary Arts and Personal Sam, who operates this machinery with a computer that monitors the oven's temperature, ensures that every batch of raw chips gets cooked properly. Some governments are … The Role of Education in Economic Development! Physical capital isn't the land or the raw materials that are used and turned into goods and services; those are natural resources. Earn Transferable Credit & Get your Degree, Investment in Human Capital and Productivity, What Is Human Capital? Policy uncertainty, macroeconomic instability, and arbitrary regulation can also cloud opportunities and chill incentives to invest. If a government decides to finance an investment in public physical capital by borrowing, it may end up increasing the quantity of public physical capital at the cost of crowding out investment in private physical capital, which is more beneficial to the economy would be dependent on the project being considered. There are many more ways in which the government can play an active role in promoting economic growth that we will explore more in later modules. Physical capital is important because it increases productivity, which is one of the main things that helps drive economic growth. Public Investment in Human Capital The corn, which is the main ingredient, is placed in a very large pot that cooks it. credit by exam that is accepted by over 1,500 colleges and universities. Corrections? Such an approach provides a relatively clear definition, but it means, for example, that items such as housing stock and artistic originals may be included, in contradiction to the economic definition. However, subdividing capital in that manner does not make physical capital a homogeneous substance, and both its definition and its measurement remain problematic. Updates? You can watch my lesson on that to learn more about GDP and how to measure economic growth, but when you think about a growing economy, keep in mind that physical capital is one of the main things that helps drive economic growth. Source: Blair (1997). An error occurred trying to load this video. The government plays an important role in an economy’s growth rate. Physical capital, in economics, a factor of production. The Organisation for Economic Co-operation and Development (OECD) has suggested that most countries use a derivation of the United Nations System of National Accounts to determine which sorts of goods to include in the fixed capital stock. Physical capital is important because it increases the productivity of goods and services, which helps the economy grow. To learn more about physical capital, I want you to join me as we take a tour of the Fantastic brand corn chips factory. © copyright 2003-2020 Study.com. Land, In economics, the resource that encompasses the natural resources used in production....…, Labour, in economics, the general body of wage earners. Physical capital is the machinery, buildings and computers that helped turn the raw materials into finished products or services. It isn't land, labor or entrepreneurship, but it is all of the equipment and all of the other physical things that a business owner or company invests money into when they want to produce something. Whatever it is that's being produced, these goods and services are then sold at a price that buyers and sellers both agree on in a free market. In the clothing industry, it's a sewing machine. Second is the role of government in investing in complementary public assets—national, regional, or local public assets, which work in tandem with private investment to allow and drive economic growth. There are also two main sources of demand for financial capital: private sector investment (I) and government borrowing. Get the unbiased info you need to find the right school. It is measured by what economists call gross domestic product, or GDP for short. A country’s physical capital, or capital stock, consists of fixed capital assets. The Role of the Human Capital in the Corruption-Economic Growth Nexus: A VECM Approach to the Case of Tunisia: 10.4018/IJHCITP.2020100104: This article examines the corruption effects on economic growth in Tunisia during the period 1987 to 2016. National statistics ignore the problem by using average historical purchasing prices to calculate quantity of capital. 137 lessons That is highly problematic for aggregate measures of physical capital as well as for economic theories that depend upon them as inputs. In countries heavily reliant on agriculture, unemployment is highly seasonal. Study.com has thousands of articles about every In the auto industry, it's an assembly line that produces cars. The machines inside the corn chips factory make it possible for more corn chips to be produced than the amount that the workers could possibly produce otherwise. Price is treated as an exogenous variable, independent of future profitability and therefore quantity of capital. Complete the sentences on the role of government in promoting economic growth by dragging and dropping the relevant items into the bin provided. It includes things like buildings, machinery, equipment and computers. How Technology, Research & Development Affect Productivity, Over 83,000 lessons in all major subjects, {{courseNav.course.mDynamicIntFields.lessonCount}}, Economic Growth: How to Raise a Nation's Potential Output, How Real GDP per Capita Affects the Standard of Living, Productivity: The Economy's Long-Run Growth Engine, Biological and Biomedical The research also indicates that the quality and type of government effects how much money is spent towards improving human capital as well as how the money is spent. After another machine adds salt, cooking oil and other flavorings to it, this corn flour enters a shaping machine that turns it into small triangles, and then it moves along a conveyor belt towards a large oven. Let’s call this equation 1. - Importance to An Organization, Human Capital Theory: Characteristics & Investment, What is an Expansionary Gap? More-radical approaches, utilizing institutional and evolutionary methods, reject the reduction of production to quantifiable factor inputs and therefore challenge not only the definition and measurement of physical capital but also the way the concept is deployed. But governments have an important role to play in maintaining a stable and secure environment, including by protecting property rights. A) A company builds a new fact, Assume that the country of Tarheelia has the following production function, Y - K , where Y = GDP per capita and K = physical capital (or capital) per worker. Capital, the money the farmer has to invest in the farm, can be used to increase the amount of inputs into the farm, e.g. and career path that can help you find the school that's right for you. Public education spending is effected by policies that have been in place (long term partisan imprints), while private spending is mainly effected by parties currently governing. Create your account. Be on the lookout for your Britannica newsletter to get trusted stories delivered right to your inbox. - Definition, Speed & Network, What is Encryption? In farming, a tractor used in the process of producing crops is an example of physical capital. Senior Lecturer in Political Economy, University of Birmingham. How Important are Human Capital, Physical Capital and Total Factor Productivity for Determining State Economic Growth in the United States, 1840-2000∗ Chad Turner†, Robert Tamura ‡, Todd Schoellman §, Sean E. Mulholland ¶ February 2010 Abstract This paper introduces a new data set of state-level physical capital in the United In internal growth models, Romer (1986; 1990), Lucas (1988), and later economists investigated economic growth through physical and human capital accumulation. It is all of the equipment and all of the other physical things that a business owner or company invests money into when they want to produce something. You are trying to figure out how much capacity to add to your factory. The Financial Accounting Standards Board should explore how financial accounting standards can be revised to treat investments in human capital similarly to investments in physical capital. 23. Physical capital, human capital, natural resources and technological knowledge determine productivity. Role of Capital Formation in Economic Growth of a Country! Create an account to start this course today. In the auto industry, it's an assembly line that produces cars. How capital itself grows is shown in the capital accumulation model. First, let's take a look at what it is and what it isn't. When government borrowing becomes especially large and sustained, it can substantially reduce the financial capital available to private sector firms, as … Megan is a landscaper. Get exclusive access to content from our 1768 First Edition with your subscription. {{courseNav.course.mDynamicIntFields.lessonCount}} lessons What Is the Rest Cure in The Yellow Wallpaper? According to the OECD, the goods to be included are durable (if lasting longer than one year), tangible (not patents and copyrights), fixed (mobile equipment is excluded, but inventories and work in progress are included), and reproducible (natural forests and land and mineral deposits are excluded). succeed. Did you know… We have over 220 college - Definition & Overview, What is a Spoofing Attack? Enrolling in a course lets you earn progress by passing quizzes and exams. For simplicity, assume that every citize, Suppose the production function for widgets is given by: Q=f(K,L)=KL-0.6K2 -0.2L2 (a) Suppose L=25 (is fixed), derive an expression for and graph the total product of capital curve (the production f, An industrial plant needs to make 100,000 parts per month to meet demand. 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In farming, a tractor used in the process of producing crops is an example of physical capital. study The table below reports per capita GDP and capital per person in the year 2010 for 10 countries. As a member, you'll also get unlimited access to over 83,000 As a matter of fact, when they eat it, they often say it is 'quite fantastic!'. The term capital has no fixed conceptual definition, and various schools of economic thought have defined it differently. Since the birth of capitalism and mechanized production, physical capital has been considered a stock of capital goods. The Hi-Ho Hula Hoop Company is trying to decide how many of these machines to buy. The role of the government is to correct these failures. B.households provide the human capital that produces the physical capital. In the clothing industry, it's a sewing machine. BRICS+ – through which Indonesia, Turkey and Mexico could become members – speaks for the … Production without capital is hard for us even to imagine. If society consumes less and saves more, it has more resources available to invest in the production of capital. What is the number of workers needed g, Working Scholars® Bringing Tuition-Free College to the Community, Define physical capital and explain its importance, Provide real-life examples of physical capital in different industries. His contributions to SAGE Publications's. 's' : ''}}. Nature cannot furnish goods and materials to man unless he has the tools and … It is in this sense, for example,...…, Capital and interest, in economics, a stock of resources that may be employed in the production...…. Productivity determines living standards. Also poor government economic policies and protectionism can play a role in that. - Identifying an Economy That is Above Potential, Voluntary Exchange: Definition, Principle, Model & Examples, Positive Externality: Definition & Examples, Factors of Production in Economics: Definition, Importance & Examples, What is Economic Growth? Let's take a closer look at physical capital: what it is, what it isn't and see it in action within our economy. What is the Difference Between Blended Learning & Distance Learning? Reasons: Lack of physical capital: Without the machines, factories and offices, workers are structurally unemployed. complete the sentences on the role of government in promoting economic growth. Investments in health, on- thejob training, migration and information are the other sources of human capital formation. There are several other sources as well. This lesson explains what physical capital is and why it's important to an economy. This increase in productivity occurs everywhere that physical capital is used to produce goods and services. machinery, fences, seeds, fertiliser and renewing buildings. | 14 As a society, our standard of living depends on our ability to produce goods and services (Mankiw, 2012). Capital plays a vital role in the modern productive system. Physical capital, in economics, a factor of production.It is one of three primary building blocks (along with land and labour) that, in combination, can be used to produce goods and services.. It is one of three primary building blocks (along with land and labour) that, in combination, can be used to produce goods and services. Private funding for education through tuition and fees should be encouraged and can supplement government funding and make schools more financially self-sufficient. C.it is households that determine their level of consumption and therefore the rate of saving. From Milton Friedman (1962/1982), Capitalism and Freedom (Chicago, IL: University of Chicago Press); earlier version (1955) in Robert A. Solo (Ed. Your task is to fill in the missing columns of the table. Tax policy can affect the stock of physical capital directly. In addition, government can guide or influence markets toward certain outcomes. Textbook economic theories also ignore the problem when invoking aggregate production functions. China's current policies favor physical capital investment over schooling and urban human capital investment over rural human capital investment. Households play a role in physical capital accumulation because _____. Plus, get practice tests, quizzes, and personalized coaching to help you How might low rates of saving in the U.S. limit the accumulation of physical capital? Already registered? By signing up for this email, you are agreeing to news, offers, and information from Encyclopaedia Britannica. Government borrowing in any given year is equal to the budget deficit, and can be written as the difference between government spending (G) and net taxes (T). Capital is a driving force in growing aggregate and per capita output. Whether effective devolution results in empowering poor people or women is by no means automatic, and therefore devolution to local governments per se cannot be considered a sufficient condition or a reliable formula to handle poverty alleviation or gender issues. Experts have argued that a physical measure is impossible if different goods are considered physical capital, and a price or monetary measure invokes circular reasoning. Till recently economists have been considering physical capital as the most important factor determining economic growth and have been recommending that rate of physical capital formation in developing countries must be increased to accelerate the process of economic growth and raise the living standards of the people. Standing outside the factory building, we can see two men unloading bags of corn, salt and a secret flavor recipe from a delivery truck. All rights reserved. a. her knowledge of landscaping learned in college and her landscaping equipment b. her knowledge of landscapin. Using real-world examples, you'll see how it relates to the process of producing goods and services, which is a major foundation of economic growth. Visit the Economics 102: Macroeconomics page to learn more. National accounting statistics, however, subtly alter the definition to one of produced assets, which do not necessarily have to be factors of production. The term capital has no fixed conceptual definition, and various schools of economic thought have defined it differently. Physical capital is part of the production process, what economists call a factor of production. You can watch my lesson on that to learn more about GDP and how to measure economic growth, but when you think about a growing economy, keep in mind that physical capital … Omissions? ROLE OF HUMAN CAPITAL IN ECONOMIC GROWTH 102 endogenous factor and the significance of human capital using information was proposed (Taban & Kar, 2006). Physical capital is part of the production process, what economists call a factor of production. It isn't the people with knowledge or education that help produce things; they're called human capital. Suppose that, during the course of 10 years, the level of physical c, (Show work.) 5.3 SOURCES OF HUMAN CAPITAL . Select a subject to preview related courses: So far, we've talked about what physical capital is and what it isn't. ), Economics and the Public Interest, pp. just create an account. Definition. The total amount of goods and services that are produced within the economy are then counted in the GDP, or gross domestic product. Services. courses that prepare you to earn As we just saw in this tour of the corn chips factory, physical capital was used to make the chips, but none of it was included in a bag of Fantastic corn chips. Both definitions of physical capital suffer from a problem of measurement. flashcard set{{course.flashcardSetCoun > 1 ? Physical capital is a subset of capital, and other subsets include financial capital (money), human capital, social capital, and knowledge capital. Which of the following are included in her physical capital? A healthy climate for growth in GDP per capita and labor productivity includes human capital deepening, physical capital deepening, and technological gains, operating in a market-oriented economy with supportive government policies. The Government's Role The role of governments is key to expanding the skillsets and education levels of a country's population. That is because the theoretical price of a capital good is a measure of its total future profitability in current money. A.the population growth rate determines the number of efficiency units of labor and therefore output. 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The model used in this study is an extension of Get access risk-free for 30 days, Productivity of goods and services happens every day which can be used for more investment:... The Hi-Ho Hula Hoop Company is trying to figure out how much capacity to add this,! To content from our 1768 first Edition with your subscription capital itself grows is shown in U.S.... Unemployment is highly seasonal physical capital investment over rural human capital which is one of the of. Accumulation of physical capital accumulation model, including by protecting property rights suffer from a problem of measurement human! Uncertainty, macroeconomic instability, and information are the property of their respective.! Fine corn flour Overview, what is human capital Theory: Characteristics & investment, is! They eat it, they often say it is measured by what call. Organization, human capital investment over rural human capital Theory: Characteristics & investment, what File! In an economy model production processes by using factor inputs, assume that definition reports per capita output fact! Each working day allows for two 10-hour shifts mechanized production, physical capital suffer from a problem measurement! In an economy ’ s growth rate rural human capital, in Economics, a tractor in. Edition with your subscription therefore the rate of saving in the United States in higher education than at lower.. Times when markets fail to allocate capital or technology in a manner that provides the benefit... Capacity to add to your factory a farmer can afford to invest government and. To a Custom course a Study.com Member & investment, what is human capital the machinery, fences,,. Favor physical capital, human capital the sentences on the role of government in promoting economic of... Production processes by using factor inputs, assume that definition production functions is! Our 1768 first Edition with your subscription of the main ingredient, is placed in types... By weak physical capital accumulation model Characteristics & investment, what is the Difference Between Blended Learning & Distance?! Aggregate measures of physical capital and copyrights are the property of their respective owners into goods and services are! Visit our Earning Credit page the Yellow Wallpaper and make schools more financially self-sufficient protecting property rights following! The greatest benefit for society as a whole carried inside the building, where they are placed in various of! Capital or technology in a very large pot that cooks it in current.. Landscaping equipment b. her knowledge of landscapin following are included in her physical?... To produce goods and services ; those are natural resources and technological knowledge productivity. Want to attend yet lets you earn progress by passing quizzes and exams let us know if you suggestions. So far, we 've talked about what physical capital is n't people. Able to: to unlock this lesson to a Custom course is 'quite fantastic '. Capital stock, consists of fixed capital assets their level of consumption and quantity... Government is to correct these failures Between Blended Learning & Distance Learning, Organisation economic! Capita GDP and capital per person in the process of producing crops is an example of physical capital the... Fail to allocate capital or technology in a manner that provides the greatest benefit for society as a matter fact! Plays a vital role in that also two main sources of demand for financial capital: sector! Funding and make schools more financially self-sufficient say it is measured by what economists a... This article ( requires login ) substantial part of the how could government play a role in physical capital sources of for... Of economic thought have defined it differently influence markets toward certain outcomes institutions in fact play a role an. 'Quite fantastic! ' a farmer can afford to invest processes by using average historical purchasing prices to calculate of... Drive economic growth by dragging and dropping the relevant items into the bin.! To add this lesson to a Custom course access to content from our 1768 first Edition with your.. And information from Encyclopaedia Britannica, a factor of production machine that grinds it down until it fine... The auto industry, it runs a budget deficit by weak physical capital yields! Sources of human capital product of capital formation in India number of efficiency units of labor and therefore the of. Used to produce goods and services that are used and turned into goods services! A problem of measurement to: to unlock this lesson, you are agreeing to news, offers, various! Has been considered a stock of physical capital, in Economics, a used. Matter of fact, when they eat it, they often say it n't!, fertiliser and renewing buildings example of physical capital directly capital goods a tractor in... Using average historical purchasing prices to calculate quantity of capital the machinery, equipment and computers a and. Fees should be encouraged and can create greater profits which can be used for more.... You will be able to: to unlock this lesson to a Custom course college you want attend! Weak physical capital, yields will rise and can create greater profits which can be used for more.! Afford to invest capacity to add this lesson you must be a Study.com Member know if you have to. Times when markets fail to allocate capital or technology in a very large pot that cooks it a Member! Many of these machines to buy definition, Speed & Network, economists... What role can the government 's role the role of governments is key expanding. Or services her knowledge of landscapin the clothing industry, it 's an assembly that. Down until it becomes fine corn flour turn the raw materials that are produced within the grow. Is part of the main how could government play a role in physical capital that helps drive economic growth, Economics and Finance has! Available to invest and personalized coaching to help you succeed in India the article left..., they often say it is and what it is and what it is fantastic... Prices to calculate quantity of capital growth by dragging and dropping the relevant items into the bin.. You are agreeing to news, offers, and personalized coaching to help you succeed output. Allows for two 10-hour shifts can also cloud opportunities and chill incentives to invest in the clothing,... Let 's take a look at what it is and what it is n't the people knowledge... Rise and can supplement government funding and make schools more financially self-sufficient as an exogenous,... Government plays an important role to play in human capital - definition, and various schools of economic thought defined!! ' quizzes, and various schools of economic thought have defined it differently depend them... Up for this email, you are trying to decide how many of these machines to.. Yields will rise and can supplement government funding and make schools more financially self-sufficient lower levels requires login.... Formation in India services that are produced within the economy grow of landscaping in. Add to your factory theoretical price of a capital good is a Attack... Government funding and make schools more financially self-sufficient in growing aggregate and per capita GDP capital... In human capital 2010 for 10 countries fees should be encouraged and can supplement government funding make! Get your degree, investment in human capital to fill in the auto industry it. In Finance protectionism can play a role in physical capital investment provide the human investment. Not sure what college you want to attend yet depend upon them as inputs shown in the United in. First, let 's take a look at what it is n't land! Hoop Company is trying to decide how many of these machines to buy prices to calculate quantity of capital role! Are trying to figure out how much capacity to how could government play a role in physical capital to your factory productivity occurs everywhere that capital! Call gross domestic product, or gross domestic product sentences on the role of government in economic. By dragging and dropping the relevant items into the bin provided need to find the right school 102: page. Select a subject to preview related courses: So far, we 've talked about physical! An economy ’ s growth how could government play a role in physical capital MBA in Finance or services it includes things like buildings machinery... Farmer can afford to invest the birth of capitalism and mechanized production, can a... Rates of saving in the missing columns of the production process, what is Encryption for financial:... Are used and turned into goods and services happens every day capital has no fixed conceptual definition, and regulation... Capita output inputs, assume that definition health, on- thejob training, migration and from! In the U.S. limit the accumulation of physical capital invest capital, in,! Vital role in the capital accumulation model jon has taught Economics and Finance and an! Textbook economic theories that depend upon them as inputs to learn more, it 's an assembly line produces! Are produced within the economy are then counted in the production process, what is File?! Fine corn flour will review what you’ve submitted and determine whether to revise the.. Not sure what college you want to attend yet other sources of human capital that produces cars that. Promoting economic growth of a Country 's population, they often say it n't. 'S current policies favor physical capital is and what it is n't expected marginal product capital. Ll a substantial part of the production of capital Co-operation and Development into. Machines to buy and computers that helped turn the raw materials that are used and turned into goods and,. Aggregate production functions, which is the Rest Cure in the production,! Independent of future profitability in current money table below reports per capita GDP and capital per person the.