There are four “factors of production” that affect what individuals and nations can produce.

• Natural Resources (Land)
• Human Resources (Labor)
• Capital Resources (Equipment)
• Entrepreneurship (risk, profit motive)

Over time, living standards rise by improving the quality or increasing the quantity of one or more of the four factors.

• There are two ways for any given sector of an economy to grow – by taking from one sector and adding it to another, or by growing the economy as a whole with all sectors participating in that growth (although not necessarily equally) If we think of the economy being represented by a pie, it could be divided into the sectors shown below:

Regardless of how we draw the lines, the total size of the pie remains the same. It illustrates a major problem facing stagnant economies – the various sectors must compete with each other if they try to enlarge their share. This becomes a de-stabilizing pressure on society.

In contrast, all sectors can grow if we can have a bigger and more efficient economy (see illustration below).

 

The expanding pie gives societies an opportunity to make adjustments within the pie without the tensions caused by growing one sector at the expense of another.

Economic growth raises a nation’s living standards and can be accomplished in many different ways.

Natural Resources grow with:

• Improved agricultural procedures such as crop rotation, soil conservation, and irrigation, can improve both quantity and quality.
• The replanting of forests increases quantity.
• Removing pollutants from our nation’s waterways improves quality.

Human Resources improve with:

• Education improves quality.
• Immigration enlarges quantity.
• Removing age, race, gender and other barriers to employment improve both quantity and quality.

Capital Resources progress with:

• Technological advances, such as the internet which improves both quality and quantity.
• Scientific research which improves both quantity and quality.

Entrepreneurship expands with:

• Recognition of private property rights including patents and copyrights which improves both quantity and quality.
• Access to financial markets (such as banks, and the stock and bond markets)
• Targeted taxation and regulation impact the quantity and quality of entrepreneurship.

15 Minute lessons that can help illustrate this concept:
Little Nino's Pizzeria: Developing Job Skills