Circulating capital

Circulating capital is a term used by classical economists such as Adam Smith, David Ricardo and Karl Marx. It refers to physical capital and operating expenses, i.e., short-lived items that are used in production and used up in the process of creating other goods or services. This is roughly equal to Intermediate consumption. It includes raw materials, intermediate goods, inventories, ancillary operating expenses and (working capital). It is contrasted with fixed capital.

Therefore, circulating capital is a component of the technical capital that participates in and is used up in a single cycle of production. It always needs replacing at every cycle (raw materials, basic and intermediate materials, combustible, energy…). In accounting, the circulating capital comes under the heading of circulating actives.

Karl Marx pointed out in the second volume of Das Kapital that the distinction between fixed and circulating capital assets is only relative - the two types of capital differ only in the length of their turnover-time, i.e. the time it takes before their value is replaced by the sale of new products produced with those assets.

Conventionally, (physical) capital assets held by a business for more than one year are regarded in annual accounting statements as "fixed", the rest as "circulating". In modern economies such as the United States, roughly half of the intermediate inputs bought or used by businesses are in fact services, and not goods.


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