Intellectual capital appears as the most important component of knowledge economy. It is very wellknown in the knowledge management literature that knowledge has become an engine of social, economic and cultural development in today’s world. Thus, education is a vitalfactor for the accumulation of intellectual capital to reach economic growth. There are thirteen universities in the Turkish Republic of Northern Cyprus TRNC , and higher education is a major sector. Income generatedfrom the education sector as well as the accelerating number of universities are two important factors which TRNC government should pay attentionto in regards to education and knowledge creation activities.Thestudy aims to emphasize the importance of knowledge economy and to create both public and government awareness particularly for TRNC and for other small economies as well. The Engle-Granger Causality test in VAR model was used to analyse the causal between education and economic growth in TRNC and the results indicate a positiveimpact of knowledge economy variables on the economy’s productivity level. Literacy rate,generaland technical high school enrolment rate and higher education enrolment rate isEntelektüalite Üzerine usedas knowledge economy variables. Furthermore, the extended Cobb-Douglas production function is appliedfor the 1977-2010 period and emphasizes the increasing returns to scale in production process within a given period in TRNC. Overall results show that the TRNC economyhas a potential to become a knowledge economy.