Question

1. Using the Aggregate Production Function, explain the sources of economic growth

Answer 1

AGGREGATE PRODUCTION FUNCTION:

The aggregate production function describes how total real gross domestic product (real GDP) in an economy depends on available inputs. Aggregate output (real GDP) depends on the following: Physical capital—machines, production facilities, and so forth that are used in production.

SOURCES OF ECONOMIC GROWTH:

Increases in capital goods, labor force, technology, and human capital can all contribute to economic growth. Economic growth is commonly measured in terms of the increase in aggregated market value of additional goods and services produced, using estimates such as GDP.

There are four basic requirements, which are:

• Natural resources - land, minerals, fuels, climate; their quantity and quality.
• Human resources - the supply of labour and the quality of labour.
• Physical capital and technological factors - machines, factories, roads; their quantity and quality.

• Institutional factors - which may include the banking system, the legal system and important factors like a good health care system.

Economic growth is caused by improvements in the quantity and quality of the factors of production, i.e.

• land,
• labour,
• capital
• entrepreneurs.

Conversely, economic decline may occur if the quantity and quality of any of the factors of production falls. In this section we look at approaches that developing countries could take to improve the quantity and quality of factors of production. We consider the following topics in detail:

• Natural factors
• Human factors
• Physical capital and technological factors
• Institutional factors