What is the APF?

The Aggregate Production Function (APF) is the function that shows a technical relationship between aggregate inputs and aggregate outputs. It is a mathematical model that economists use to illustrate the change in productivity because of the changes in factors of production. It helps an economy to produce its potential level of output. Economic growth increases as functions of aggregate production increase due to technological, human capital, knowledge, and social infrastructure changes.

Aggregate Production Function Factors

Aggregate output depends on the following factors of production that majorly influence the economy:

• Physical Capital: It accounts for the assets that firms or governments create and employ in the process of production. These include assets such as buildings, plants, machines, equipment, computers, and other production facilities.

• Human Capital: It accounts for the skill and education of the economic workforce.

• Labor: It is skilled and unskilled labor input. It includes entrepreneurship, which constitutes business intelligence that firms and institutions apply to the production function. 

• Land: It also includes land, its natural resources, and the raw materials available.

• Knowledge: It accounts for the technical or scientific expertise that helps the production process.

• Infrastructure: It includes social, legal, business, and cultural setup in an economy.

• Factors other than physical and human capital and labor are termed technology.

APF Graph and Formula

Y = A*F (K, L)

• Y denotes the real GDP, i.e., aggregate output in an economy.

• A represents the technological factor. It is a measure of the economy’s overall productivity. 

• K is the total quantity of non-human capital input into the economy. It is measured in dollars or physical units.

• L is the number of employees in the economy (human capital).