A:

Real economic growth only comes from increasing quality and quantity of the factors of production, which consist of four broad types: land, labor, capital and entrepreneurship. Saving and discovery are the two basic ways to improve or increase the factors of production. Saving occurs when present consumption is delayed, and those resources are instead used to enable capital investment. Discovery can include technique or process discovery, technological discovery or resource discovery.

Defining a Factor of Production

The St. Louis Fed defined the factors of production as "what people use to produce goods and services." Improvement along these factors enables producers to create more and cheaper economic goods. This, in turn, allows consumers to earn more for their labor services and to pay less for existing goods.

Land and labor are the earliest factors of production; humans have always mixed their labor with land and natural resources. Income from land and labor are called rent and wages, respectively.

The third factor, capital, includes all those resources or tools that humans use to improve their productivity. (For more, see "Why Is Productivity an Important Concept in Economics?") Common forms of economic capital include machinery, tools, and buildings. Income from capital resources is normally called interest.

Entrepreneurship is a little more controversial. Most classical economic models largely ignore it, or consider it a subset of labor. So Why do some economists consider entrepreneurship to be a factor of production?  Because it can increase the productive efficiency of a firm. However, some economists don't consider it a separate good, but rather the purposeful combination of the other three factors. An entrepreneur can identify new opportunities among the other factors without necessarily controlling them. Payment to entrepreneurship is called profit.

Creating Economic Growth

The purpose of economic organization – including all labor – is to create things that people value. Economic growth occurs when more and cheaper goods can be created. This raises the standard of living by lowering costs and raising wages.

As Parmenides, a Greek philosopher, famously quipped, "Nothing comes from nothing." Growth can't be legislated or wished into existence; it needs to be produced.

Economic growth results from better factors of production. This process is clearly demonstrated when an economy undergoes industrialization or other technological revolutions; each hour of labor can generate increasing amounts of valuable goods.

RELATED FAQS
  1. What inputs are considered to be factors of production?

    Learn what the four categories of factors of production are and how different schools of economic thought view them. Read Answer >>
  2. What is 'capital' in relation to the factors of production?

    Find out what economists mean by physical capital, how it contributes to the productivity of labor and why it is a crucial ... Read Answer >>
  3. How do "factor endowments" impact a country's comparative advantage?

    Find out how factor endowments – namely labor, land and capital – affect a country's comparative advantage and how that advantage ... Read Answer >>
  4. What is the difference between a capital good and a consumer good?

    Learn to differentiate between capital goods and consumer goods, determined by how those goods are used, and see why capital ... Read Answer >>
  5. What determines labor productivity?

    Examine the two primary components of labor productivity, applied technical efficiency and available capital goods, and learn ... Read Answer >>
  6. Which factors can influence a country's balance of trade?

    Find out about the factors that affect a country's overall balance of trade and how it is used as an economic indicator. Read Answer >>
Related Articles
  1. Insights

    Is Infinite Economic Growth on a Finite Planet Possible?

    While the finite nature of Earth's resources limits the direction of economic growth, it does not mean that infinite economic growth is impossible.
  2. Insights

    One Reason Jobs Shrink: Superstar Companies

    Are superstar companies that dominate their industries but employ relatively few workers to blame for labor’s falling share of GDP?
  3. Small Business

    Why Entrepreneurs Are Important for the Economy

    Entrepreneurship is important to the economy in many ways, but it can potentially have a damaging effect as well if not properly regulated.
  4. Insights

    The Economics of Labor Mobility

    Loosening labor restrictions, which allows for geographic and occupational mobility, has both good and bad effects on a country and its workers.
  5. Insights

    Breaking Through The Middle Class

    While there is no easy way to the top, understanding some basic economics will help you you move up the economic ladder.
  6. Small Business

    The 4 Best Online Entrepreneurship Programs

    Learn about some of the pre-eminent graduate-level entrepreneurship programs available online, and decide which program best fits your needs.
  7. Investing

    How Globalization Affects Developed Countries

    The increase in communications technology has companies competing in a global market.
  8. Managing Wealth

    An Introduction To Factor Investing

    Factor investing delivers risk adjusted results that deliver the same or better investment returns as the overall market but with less risk.
RELATED TERMS
  1. Economic Growth

    Economic growth is an increase in an economy's ability to produce ...
  2. Land

    Land is property or real estate, minus buildings and equipment, ...
  3. Discovery Value Accounting

    Discovery value accounting was a former method of accounting ...
  4. Entrepreneur

    An entrepreneur is an individual who founds and runs a small ...
  5. Capital Investment Factors

    Capital investment factors are factors affecting the decisions ...
  6. Production Cost

    Production costs are costs incurred by a business when manufacturing ...
Hot Definitions
  1. Current Assets

    Current assets is a balance sheet account that represents the value of all assets that can reasonably expected to be converted ...
  2. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  3. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  4. Cost of Debt

    Cost of debt is the effective rate that a company pays on its current debt as part of its capital structure.
  5. Depreciation

    Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life and is used to account ...
  6. Ratio Analysis

    A ratio analysis is a quantitative analysis of information contained in a company’s financial statements.
Trading Center