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The Aggregate Production Function

Sources of Economic Growth: The Aggregate Production Function

To analyze the sources of economic growth, it is useful to think about a production function, which is the process of turning economic inputs like labor, machinery, and raw materials into outputs like goods and services used by consumers. A microeconomic production function describes the inputs and outputs of a firm, or perhaps an industry. In macroeconomics, the connection from inputs to outputs for the entire economy is called an aggregate production function.

Components of the Aggregate Production Function

Economists construct different production functions depending on the focus of their studies. This figure presents two examples of aggregate production functions. In the first production function, shown in figure (a), the output is GDP. The inputs in this example are workforce, human capital, physical capital, and technology. We discuss these inputs further in the module, Components of Economic Growth.

Aggregate Production Functions

The first illustration shows that workforce, human capital, physical capital, and technology produce GDP. The second illustration shows that human capital per person, physical capital per person, and technology per person produce GDP per capital.

An aggregate production function shows what goes into producing the output for an overall economy. (a) This aggregate production function has GDP as its output. (b) This aggregate production function has GDP per capita as its output. Because it is calculated on a per-person basis, the labor input is already figured into the other factors and does not need to be listed separately.

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