Role of Factors of Production in Economic Growth

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ECONOMIC GROWTH AND SUSTAINABLE DEVELOPMENT
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Overview of economic growth theory
Countries across the globe measure economic growth by checking changes in the annual
gross domestic product (Bhargava, 2015). To establish the economic growth of a country,
economists observe the inflation-adjusted value of commodities produced within the economy
for a specified period of time. The resulting data is used to compare the country’s performance
against others at the same level of economic development. Additionally, the economic
researchers establish the living standards of the citizens in the country in terms of factors such as
income, employment, technology advancement among others (Chetty, 2015). Measurement of
economic growth enables a country to identify the wealth disparities among the citizens and
different countries. Therefore, the government plans economic growth policies to reduce
economic gaps. The various policies include improving infrastructure, boosting the education
systems and favourable tax and loan interest policies.
The report uses various studies explained the economic growth theories from different
perspectives. For example, the Malthusian theory states that over a long period of time,
advancement in technology only caused an increase in population without benefitting the long
term income per capita (Blecker, 2016). The argument was that the increase in population
consumed the additional output arising from technology advancement. Therefore, countries have
to device policies and strategies that increase technology and minimize population increase.
Another theory is the Solow-Swan model that assumes that capital and labour have
diminishing returns (Carpintero, 2013). The theory emphasizes the importance of improving
technology within the economy. Therefore, an increase in productivity through technology
advancement causes an increase in worker output even when the economy is at a steady state.
Therefore, countries can increase the level of gross domestic product attributable to worker

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output by increasing investment in technology. Consequently, if all countries have access to the
same technology then the global economy would reach a constant steady state. Likewise, poor
countries have the ability to grow fast and reach economic levels similar to developed countries
(Brown, 2014).
Furthermore, Adam Smith described economic growth based on the Laissez-faire
principle, which states that the state should desist from placing restrictions on people’s freedom
(Burdina, 2015). The citizens should have the ability and freedom to produce as much produce as
possible. The theory is based on three components that include savings, wide market and division
of labour. Therefore, the citizens of a country have the power to accumulate any amount of
wealth possible. Additionally, the state should leave the economy under the control of the
invisible hand, meaning that the forces of competition minimize the amount of savings within the
economy for the purpose of developing wealth (Bryan, 2014).
Adam Smith further recognized the three functions of the production function namely,
capital, land and labour (Curran, 2014). Smith recognized labour as the major engine for
economic growth due to the ability to supply to all other factors of production. Therefore, for
economic growth, countries should insist on developing both skilled and unskilled workers. The
ability of the employees of a country to produce high-quality work by combining both skills and
technology increases the demand for products both locally and internationally (Laibson, 2015).
Therefore, the country earns more from foreign exchange and local purchases.
Harold-Domar theory on economic growth insists on wealth accumulation as the major
component. The theorist paid attention to the economy after the economic damage caused by
World War II (Dufour, 2014). Therefore, Harold-Domar concluded that accumulation of capital
generates income and increases the economic capacity of a country. For example, the

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establishment of a construction company generates income to parties such as suppliers of bricks,
cements and labour while increasing the production and capital in the economy (Johnson, 2011).
Consequently, for economic growth to occur, the demand arising from newly generated income
should fully consume the output from the new investments.
Role of factors of production
Land
Land occurs free as a gift of nature for human beings to use for several uses to get rents
and rates as the reward (Elmslie, 2010). Land plays a major role in the economic development of
a country due to the many ways citizens can gain benefit. For example, land is the source of raw
materials such as food products and minerals. The minerals and food produce give advantage to
countries in foreign markets due to the uniqueness of the products supplied. For example, land
offers minerals such as gold, which is a rare commodity and fetches high prices in the market.
Therefore, countries that produce gold have a benefit in the market and earn much from foreign
markets. Additionally, other countries have oil, which has high demand in international markets.
Oil is a rare commodity and is used in all countries across the globe, therefore, countries with oil
have an advantage in the market (Hilmer, 2012). Therefore, countries with rare commodities
such as gold and oil experience a higher gross domestic product compared to countries without.
The countries that have oil and gold have better development in terms of infrastructure, living
standards of citizens and gross domestic product.
On the other hand, land enables agriculture for economic activities and consumption
(Foley, 2012). Many countries try to put much land under agriculture to increase output.
Agriculture ensures that a country is in a good position in terms of food security and meeting

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international market demands. The international markets demand commercial products such as
tea, coffee and horticulture, which increases a country’s gross domestic product (Guzman, 2015).
Most countries across the globe have developed strong economies based on agriculture.
Therefore, land is important in the economic performance of a country.
Currently, major investments in land have moved towards real estate, which has led to
major infrastructural developments with a bid to increase the value of land (Giacomin, 2017).
The developers focus on availing basic amenities such as electricity, proper roads and access to
water, health centers and schools. The availability of the amenities ensures that land demands a
high value in the market. Consequently, with improved infrastructure and access to social
amenities, the country experiences improved living standards. Therefore, the country experiences
a higher gross domestic product since the citizens have the ability to deliver products to the
market with better roads (Guzman-Concha, 2015).
Labour
Labour is the most important factor of production in an economy with the reward being
salaries and wages (Lavoie, 2015). A country should ensure that employee composition includes
both skilled and unskilled employees to increase production. The skilled employees increase the
gross domestic product of a country by exploiting available resources to generate output.
Therefore, the gross domestic product increases resulting in economic growth. To increase the
level of employee skills a country should invest in better education systems such as vocational
training, colleges and universities. The schools equip the employees with better manual and
computer skills of production.
Additionally, labour contributes to economic growth through taxes such as income tax
and value-added tax. A country with high labour collects more income tax, which is used in the

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development if infrastructure and delivery of social amenities (Lazear, 2015). The development
of infrastructure and availability of social amenities indicates higher living standards for the
citizens. Additionally, infrastructure such as roads and energy allows the citizens to engage in
more economic activities, which increases the output per capita. Therefore, countries should
ensure that a high number of citizens access employment to generate revenues.
Furthermore, for labour to give a higher contribution to economic growth, countries
should introduce technology (Mikami, 2013). The technology should automate work done by
humans to reduce errors and increase output per hour. A country that manages to introduce
technological advances to small and large scale industries experiences higher productivity.
Therefore, countries should engage in research to improve the level of automation involved in
the production.
Capital
Capital plays a role in the economic growth of a country with the reward being interest
from investments (Liagouras, 2016). Many countries encourage citizens to invest in capital
goods such as stock that matures to earn interest. The investment in capital assets ensures that
citizens do not hold idle money in the form of bank savings. Therefore, the citizens venture in
capital assets such as machinery, vehicles, tools and other profit generating equipment. The
capital assets such as machinery, tools and equipment assist in the conversion of raw materials
through value addition to finished goods and services for sale in the market. Consequently, the
citizens generate income in the form of profits from the sale of value-added products.
However, financial capital differs from human capital goods. Financial capital refers to
funds required for the sustenance and growth of the business such as debt and equity while
human capital refers to actual human beings participating in production (O'Donoghue, 2015).