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 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 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

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 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

Create a Circular Flow Chart You will create an individual product and will create a Circular Flow Chart that goes along with it. There should be eight arrows and the meaning of the arrows should be listed. You will have to answer the following question: “What is the difference between product markets and factor markets? Explain”

Productivity 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

Specialization 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 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 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 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.