Factors Determining Economic Productivity and Output

Posted on Dec 11, 2025 in Economy

Factors Determining Economic Productivity

An increase in the capital-to-labor ratio (K/L) causes an increase in output per worker (Y/L).

How Productivity Is Determined – Part 1

  • Natural Resources (N)
    • Inputs into production that nature provides (land, rivers, and mineral deposits).
  • Natural Resources per Worker (N/L)
    • Other things equal, more natural resources allow a country to produce more output (Y).
    • An increase in N/L causes an increase in Y/L.

How Productivity Is Determined – Part 2

  • Technological Knowledge (A)
    • Society’s understanding of the best ways to produce goods and services.
    • Common knowledge: After one person uses it, everyone becomes aware of it.
    • Proprietary: It is known only by the company that discovers it.
    • Any advance in knowledge that boosts productivity and allows society to get more output from its resources.

Technological Knowledge vs. Human Capital

  • Technological Knowledge
    • Refers to society’s understanding of how to produce goods and services.
  • Human Capital (H)
    • Results from the effort people expend to acquire this knowledge.
  • Both are important for productivity.

The Production Function

The Production Function Formula – Part 1

  • Production function: Y = A × F(L, K, H, N)
    • A graph or equation showing the relation between output (Y) and inputs.
    • F( ) is a function that shows how inputs are combined to produce output.
    • “A” is the level of technology.
    • “A” multiplies the function F( ), so improvements in technology (increases in “A”) allow more output (Y) to be produced from any given combination of inputs.

The Production Function – Part 2: Returns to Scale

  • Constant Returns to Scale:
    • Changing all inputs by the same percentage causes output to change by that percentage.
    • Doubling all inputs (multiplying each by 2) causes output to double: 2Y = A × F(2L, 2K, 2H, 2N).
    • Increasing all inputs 10% (multiplying each by 1.1) causes output to increase by 10%: 1.1Y = A × F(1.1L, 1.1K, 1.1H, 1.1N).

Key Concepts for Assessment

  1. What is macroeconomics, and what does it do?
  2. Definition of GDP, and why we use it. It is important because it helps us evaluate the health of the economy.
  3. GDP measures what and what?
  4. The circular flow diagram in total.
  5. There are two types of goods and services that are not included in GDP:
    Answer: Anything that is not legal, and things produced within your household.
  6. What do Y and C represent in the formula? Y represents GDP, and C represents Consumption.
  7. What word do economists use for producing more: Investment.
  8. A US nail gun: which counter? (Direct question from test).
  9. What is Net Export? Export – Import.
  10. GDP Deflator: Is always 100 (as a base year reference).
  11. Baby Ruth example: Answer is D (Direct question).
  12. CPI components: Housing, food, transportation, clothing, education, health care.
  13. Difference between inflation and deflation.
  14. To calculate CPI, you need: Price and quantity.
  15. Problems with calculating CPI: Substitution bias, introduction of new goods.
  16. Differences between GDP deflator and the impact of inflation on debt.
  17. What is COLA? Cost of Living Adjustment.
  18. How to calculate the real interest rate: Nominal interest rate – inflation rate = real rate.
  19. A nation’s standard of living is determined by: Productivity.
  20. There are large differences in the standard of living across countries and within countries (Answer C – Direct).
  21. Productivity formula: Y/L = A × F (L, K, H, N).
  22. Example of physical capital: Factory, equipment.
  23. Human capital: (Requires definition/examples).
  24. Example of non-renewable resources: Oil.
  25. Capital investment: Buying equipment for your business.