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. 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 entrepreneurs. Some economists don't consider it a separate good, but rather the purposeful combination of the other three factors. 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.

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