Factors of Production, the Four Types, and Who Owns Them
The Bedrock of the Economy
The four factors of production are land, labor, capital, and entrepreneurship. They are the inputs needed for supply. They produce all the goods and services in an economy. That's measured by gross domestic product.
Land as a Factor of Production
Land is short for all the natural resources available to create supply. It includes raw property and anything that comes from the ground. It can be a non-renewable resource. That includes commodities such as oil and gold. It can also be a renewable resource, such as timber. Once man changes it from its original condition, it becomes a capital good. For example, oil is a natural resource, but gasoline is a capital good. Farmland is a natural resource, but a shopping center is a capital good.
The income earned by owners of land and other resources is called rent.
The United States is blessed with an abundance of easily accessible natural resources. These include fertile land and water. Many countries are covered with mountains or desert, making it expensive to use the natural resources. It has miles of coastline, lots of oil, and a moderate climate. That's an advantage over Canada. It has similar natural resources, but they are frozen for most of the year. Global warming is beginning to change that, making Canada one of the winners of climate change.
Labor as a Factor of Production
Labor is the work done by people. The value of the workforce depends on workers' education, skills, and motivation. It also depends on productivity. That measures how much each hour of worker time produces in output.
The reward or income for labor is wages.
The United States has a large, skilled, and mobile labor force that responds quickly to changing business needs. It also benefits from productivity increases due to technological innovations. On the other hand, the U.S. labor force faces increasing competition from other countries. That's one reason why American jobs are being outsourced.
The Bureau of Labor Statistics measures the U.S. labor force. It releases the current U.S. jobs report the first Friday of each month. The report includes the employed and the unemployed. The employed only include people over 16 who worked in the past week. It excludes the active military and any residents of an institution. The unemployed are those who actively looked for a job in the past month. All the other jobless are not members of the labor force.
Capital as a Factor of Production
Capital is short for capital goods.These are man-made objects like machinery, equipment, and chemicals that are used in production. That's what differentiates them from consumer goods. For example, capital goods include industrial and commercial buildings, but not private housing. A commercial aircraft is a capital good, but a private jet is not.
The income earned by owners of capital goods is called interest.
The U.S. Bureau of Economic Analysis measures capital goods production with the monthly durable goods orders report. It reports on total capital goods order, shipments, and inventory. It also strips out defense and transportation. Those orders come in large batches. It can hide the real trends. Capital goods production has declined since the Great Recession. Demand for them hasn't returned to the same levels. As a result, companies aren't investing in new equipment. They are buying back stock shares, purchasing new businesses, and looking for opportunities overseas.
Entrepreneurship as a Factor of Production
Entrepreneurship is the drive to develop an idea into a business. An entrepreneur combines the other three factors of production to add to supply. The most successful are innovative risk-takers.
The income entrepreneurs earn is profits.
The majority of entrepreneurs in the United States own small businesses. That's 5.8 million out of six million companies. They create 65 percent of all new jobs. One reason small businesses do so well is that it's relatively easy to get funded compared to other countries. Others raise money on the stock market by issuing an initial public offering. Shares in these companies are called small-cap stocks.
Who Owns the Factors of Production
Ownership of the factors of production depends on the type of economic system and society.
|Factors of Production||Socialism||Capitalism||Communism|
|Are owned by||Everyone||Individuals||Everyone|
|Are valued for||Usefulness to people||Profit||Usefulness to people|
Why Some People Think There Are Five Factors of Production
Capital finance is sometimes called the fifth factor of production. But that's not accurate. Money facilitates production by providing income to the owners of production.
Federal Reserve Bank of St. Louis. "Factors of Production - The Economic Lowdown Podcast Series, Episode 2," accessed Dec. 4, 2019.