There is less to say about what determines the amount of natural resources in the production function. The natural resources available to a country are largely accidents of geography. The United States is fortunate to have high-quality agricultural land, as well as valuable deposits of oil, coal, natural gas, and other minerals. South Africa has deposits of gold and diamonds. Saudi Arabia, Iraq, Kuwait, the United Arab Emirates, and other Middle Eastern countries have large reserves of oil. The United Kingdom and Norway have access to oil and natural gas from the North Sea. For every country, we can list its valuable natural resources. Natural resources are divided into those that are renewable and those that are nonrenewable. A renewable resource is a resource that regenerates over time. A nonrenewable (exhaustible) resource is one that does not regenerate over time. Forests are an example of a renewable resource: with proper management, forests can be maintained over time by judicious logging and replanting. Solar and wind energy are renewable resources. Coal, oil, and minerals are nonrenewable; diamonds taken from the ground can never be replaced.
It is difficult to measure the natural resources that are available to an economy. The availability of oil and mineral reserves is dependent on the technologies for extraction. These technologies have developed rapidly over time. The economic value of these resources, meanwhile, depends on their price in the marketplace. If the price of oil decreases, the value of untapped oil fields decreases as well.
Economists and others sometimes use real gross domestic product (real GDP) as an indicator of economic welfare. One problem with real GDP as an indicator of economic welfare is that it fails to take into account declines in the stock of natural resources. [***In Chapter 3 "The State of the Economy", we note several of these.***] If the stock of natural resources is viewed—as it should be—as part of the wealth of a country, then depreciation of that stock should be viewed as a loss in income. (The same argument, incidentally, applies to depreciation of a country’s physical capital stock. Real GDP also does not take this into account. However, national accounts do report other statistics that adjust for the depreciation of physical capital, whereas they do not report any adjustment for natural resource depletion.)
KEY TAKEAWAY
The human capital of a country can be accumulated by education, the training of workers, and immigration of workers into that country.
Knowledge about new products and new processes is created by R&D activities within firms, universities, and government agencies.
Property rights influence the amount of capital in the aggregate production function. In an economy where property rights are not well defined, there is a lower incentive to invest and hence less capital.
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Checking Your Understanding
How does on-the-job experience affect the human capital of an economy?
Why is it difficult to measure the natural resources available in an economy?
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