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Economic Activity and Productivity. To the economist, a market is a location or situation where buyers and sellers exchange an economic product Markets may be local, regional, national, or global

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To the economist, a market is a location or situation where buyers and sellers exchange an economic product

Markets may be local, regional, national, or global

The flow of resources, goods and services, and money in a market system between the groups of economic decision makers is circular

Economists use the circular flow diagram (an economic model) to illustrate how the market system works (look at the model on page 429 of your online textbook)

groups of economic decision makers
Groups of Economic Decision Makers

The consumer sector

Earn their income in factor markets

Workers earn wages, salaries, tips in exchange of their labor

People who own land can loan it out in exchange for rent (income)

People who own capital exchange it for interest

Individuals receive their incomes and spend it in product markets

Purchases about 2/3 of all output (GDP)


The business sector

Receives payments in the product markets where they sell goods and services to consumers

Use the payments to pay for natural resources, labor, and capital they use

The resources are then used to manufacture additional products that are sold in product markets

Usually consumes about 15 to 20 percent of GDP


Look at the circular flow diagram on page 429 of your online textbook at the consumer and business sectors

The business sector purchases some of the output it produces-primarily capital goods- so that it can continue to produce more goods and services

-these purchases include items like tools, factories, and other goods needed for current production


The Government Sector

Consists of all three levels of government (local, state, and national)

Produces goods and services (transportation, housing, education, health, etc) and purchases productive input in the factor markets

Receives revenue for the services that it sells (bus fare, postage stamps, etc.) but the total costs of government services is seldom covered by the fees alone and receives most of its revenue from taxes

Revenue is used to purchase final goods and services in the product markets (schools buy textbooks)

Purchases apx 20% of the GDP


The foreign sector

Represents all the countries in the world

The United States sells products to, and purchases products from other countries

The value of goods and services that the US sells to other countries tends to offset the purchases that the US makes from other countries

Less than 4% of the GDP

productivity and economic growth
Productivity and Economic Growth

Economic growth occurs when a nation’s total output of goods and services increases over time

The circular flow becomes larger with more factors of production, goods, and services flowing one direction, and more payments flowing in the opposite direction

Economic growth is important because it increases people’s standard of living


Everyone benefits when scarce resources are used efficiently.

Productivity goes up whenever more output can be produced with the same amount of inputs in the same amount of time or when the same output can be produced with less input

Often discussed in terms of labor, but is applied to all factors of production

Business owners try to buy the most efficient capital goods and farmers try to use the most fertile soil for crops


When people, businesses, regions, and/or countries concentrate on goods or services that they can produce better than anyone else

Improves productivity

Nearly everyone depends on others to produce the things that he or she consumes

Specialization occurs because we earn more money and it is more efficient doing so

When people specialize, they are more productive than by attemping to do many things

division of labor
Division of Labor

The breaking down of tasks into smaller, separate tasks which are performed by different workers

A form of specialization that improves productivity

Makes use of different skills and abilities

human capital
Human Capital

The sum of the skills, abilities, and motivation of people

Increases productivity

Investments by government and businesses in training, health care, and employee motivation tend to increase the amount of production that takes place with a given amount of labor

Employers are usually rewarded with higher-quality products and increased profits

Workers often benefit from higher pay, better jobs, and more satisfaction with their work

economic interdependence
Economic Interdependence

American economy displays because of specialization

Americans are relied upon and rely on others to provide goods and services that are consumed

Events in one place can affect or impact other places

Example: dairy prices increase because government subsidy is removed, ice cream price goes up

Gain in productivity and income that results from increased specialization usually offsets the costs associated with the loss of self-sufficiency.