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.