What causes economic output to increase? One way that output can increase is if there is an expansion in the inputs used to produce it. There are five kinds of capital. Human-produced capital is called manufactured capital to distinguish it from the other kinds of capital. Land and natural resources are natural capital, and all the skills and knowledge possessed by humans are also a kind of capital – human capital. We also note the importance of social and financial capital, which both refer to institutional arrangements that make production possible.

Economists sometimes think about output as being generated according to a "production function," which is a mathematical relation between various inputs and the level of output. In the most general sense we might say that the output of an economy should be expressed as a function of flows from all the different types of capital that make production possible. The inputs to the production function are commonly referred to as factors of production. In the production functions most commonly used by economists, the factors that are emphasized are manufactured capital and labor. Sometimes, but not always, natural resources also are included.

where Y is aggregate output, A is a number based on the current state of technology as described below, K is a quantitative measure of the size of the stock of manufactured capital, and L the quantity of labor used during the period of time. K and L are the only factors of production explicitly included in the model. Both capital and labor are needed for the production of output, with the exponents in the equation reflecting their relative contributions.

A is called total factor productivity, and includes all contributions to total production not already reflected in levels of K and L. Often, “total factor productivity” has been interpreted as reflecting the way in which technological innovation allows capital and labor to be used in more effective and valuable ways. For example, the development of computer word-processing greatly increased efficiency compared to the use of typewriters. Typewriters, which seem antique to us today, were themselves a huge productive advance over clerical work using pen and paper. This process of improved technological methods has resulted in an increase in labor productivity – more output can now be produced with fewer labor-hours.

For example, if “total factor productivity” grows at 1% per year and capital per worker grows at 2% per year, this equation says that output per worker will grow at 1.6% per year (1% + (0.3)2% = 1.6%). This became known as the “growth accounting” equation.

Note that output per worker is what is commonly referred to as “labor productivity”. While labor productivity and GDP per capita are not quite equivalent (some people in the population do not work, for example), they are obviously closely related. Thus, this model implies that the way to raise income per capita—to achieve economic growth—is to increase the amount of capital that each person works with (the second term) and improve technology (the first term).

The use of the Solow growth model served to highlight some important factors in economic growth. In particular, the model led to much discussion of the role of savings in providing the basis for growing levels of manufactured capital per worker. Technological change also received attention, since this was thought to be the main driver behind growth in the value of "A." For many years, economists tended to treat growth as primarily a matter of encouraging savings, investment, and the creation and dissemination of technology.

In more recent years, other economists have suggested that perhaps this model has directed too much attention to savings and technology. Some have argued that other factors such as good institutions that support markets, innovations in the organization of work, or access to global markets should be thought of as equally important in promoting economic growth. It is not helpful, they suggest, to fold all issues of social, human, financial and natural capital into just one, rather vague, "A" term.