Output in a country is determined by 4 factors: the
quantity of labor, L, the quantity of physical capital,
K, the quantity of skill, or human capital, H, the
amount of natural resources, N, and efficiency, A
which represents how efficient society is in using the
inputs to production.
Economists use the concept of a
production function
to think about how the productive inputs of labor,
capital, and the other factors are turned into output.
Essentially, a production function is a recipe for
creating output from inputs.
For example, to make bread, we need flour, water,
yeast, workers, and capital, including ovens. The
recipe tells us how to use these inputs to produce
bread.
Below, we write the production function, which we
denote as F:
Y = A*F(K,L,H,N)
The left hand side is output, on the right hand side
we have A*F(K,L,H,N), where A is efficiency, and F is
the production function that transforms the inputs