The inputs that are used in the production process to facilitate the production of the goods and services which contribute to an economy's GDP. An input can be classified as either labour, capital, land or enterprise, depending on the function that the input serves in the production process. A summary of the main characteristics of the four factors of production are highlighted in the table below.
- Labour represents the mental and physical human input into the production process. Therefore the quantity (size of the workforce) and quality (productivity of workforce) of labour affects the importance of labour in the production process of any good or service. Factors such as increased education and training and an increase in migration levels can result in an increase in output of an economy's resources. Workers receive a wage based on their productivity and monetary value to a company at any particular point in time i.e. for every hour of labour supplied by workers this is in return for an hourly wage rate.
- Land represents all of the natural resources a country is endowed with such as the land or the sea. However, it also includes all of the resources which can be extracted and cultivated from those natural resources such as agricultural products from farms. Developing countries are often land abundant (large endowment of natural resources) and therefore specialise and rely upon the agricultural sector for economic growth. The reward for land is rent as landowners rent the land out to producers across the economy.
- Capital represents the goods which are used in the production process to help produce the final product. It is made up of two different forms of capital: working capital and fixed capital. Fixed capital represents the machinery, technology, and buildings which are used to help produce the final goods and services. Working capital represents the day-to-day capital used to help produce goods in the future, this can include cash or the stock of unfinished inventories. Capital owners receive a reward of interest as producers increase their capital stock by taking out loans and borrowing from the private sector. Therefore, interest represents the opportunity cost of borrowing for firms and the reward for owners of each unit of capital.
- Enterprise represents the individuals that help organise the complex mix of factors of production in the production process of any good or service so that a profit is made as a result. Examples of enterprise may include managers or investors that take risks in the company with their own money to gain a share of higher profits in the future.