UPSC Prelims 2024 Q47: Fixed vs Working Capital — Explained

With reference to physical capital in Indian economy, consider the following pairs:

| Sl.No. | Items | Category |

| 1 | Farmer's plough | Working capital |

| 2 | Computer | Fixed capital |

| 3 | Yarn used by the weaver | Fixed capital |

| 4 | Petrol | Working capital |

How many of the above pairs are correctly matched?

  1. Only one
  2. Only two
  3. Only three
  4. All four

Answer: (b) Only two

Statement-wise explanation

  • 1: incorrect — A plough is a tool. A farmer uses it season after season and it is not used up in any one round of production. The NCERT Class 9 Economics chapter 'The Story of Village Palampur' names the farmer's plough as an example of fixed capital. So the pair with working capital is wrong.
  • 2: correct — A computer is a machine that is used in production for many years. NCERT names it with generators and turbines as fixed capital. The pair is correctly matched.
  • 3: incorrect — Yarn is a raw material. It is used up when the weaver turns it into cloth. NCERT gives 'the yarn used by the weaver' as its own example of working capital, so matching it with fixed capital is wrong.
  • 4: correct — Petrol is burnt in one round of production and is gone. It does not last for many years like a machine. Like raw materials, inputs that are used up count as working capital, so the pair is correctly matched.

How to eliminate

You only need one test: does the item last through many rounds of production, or is it used up in one? Tools, machines and buildings last, so they are fixed capital. Raw materials, fuel and money in hand are used up, so they are working capital. A plough and a computer both last. Yarn and petrol are both used up. That sorts all four pairs. The examiner swapped the labels on the plough and the yarn, and both examples come word for word from NCERT. Only pairs 2 and 4 survive. A candidate who remembers the NCERT lines (plough to computer = fixed; yarn, clay = working) can solve this in seconds. A candidate who does not can still work it out from what each item does.

Know more

Physical capital is the stock of man-made goods used to produce other goods. NCERT (Class 9, 'The Story of Village Palampur') lists it as one of the four requirements of production, along with land, labour, and knowledge and enterprise (human capital). It divides physical capital into two kinds.

Basis Fixed capital Working capital
What it is Tools, machines, buildings Raw materials and money in hand
Life Used over many years Used up in one round of production
NCERT examples Farmer's plough, generators, turbines, computers Yarn used by the weaver, clay used by the potter
Other examples Tractor, tubewell, factory shed, delivery van Seeds, fertiliser, fuel, electricity, cash for wages
In national accounts Wears out gradually (depreciation, or consumption of fixed capital); new additions are Gross Fixed Capital Formation Treated as intermediate consumption; unused stocks count as change in inventories

The same object can fall on different sides depending on its use. A car used by a taxi operator for years is fixed capital. The diesel that runs it is working capital. A tool lasts many years even if it is cheap, so a cheap tool is still fixed capital. A raw material is used up even if it is expensive, so a costly raw material is still working capital. What decides the category is how the item is used up, not what it costs.

Do not mix up this pair with two other pairs. Physical capital vs human capital: human capital is the skill and health built into people. Physical vs financial capital: financial capital is the money used to buy physical capital. In business accounting, 'working capital' also means current assets minus current liabilities. The NCERT sense of the term is the one UPSC tests here.

NCERT Concepts to Revise

  • Physical capital: The question covers only physical capital. Each of the four items has to be placed inside this category first.
  • Working capital: Two pairs claim the label 'working capital'. Check each item against what working capital pays for.
  • Capital goods: Capital goods are durable producer goods. Use this to judge whether the plough and the computer are durable assets.
  • Final goods: Final goods are the opposite of inputs used up in production. This helps you think about the yarn and the petrol.
  • Depreciation: Only fixed assets depreciate over years. Asking 'does this item wear out slowly?' sorts each pair.

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