Economic Activity and Productivity Chapter 19.2 Economic Activity and Productivity

Circular Flow of Economic Activity A market is a location or other situation that allows buyers and sellers to exchange a certain economic product. Markets can be local, regional, national or global. The economic decision makers are the consumer, business, gov’t and foreign sectors. A circular flow of economic activity – resources, goods and services and money – takes place among these groups.

continued Consumers earn their income in factor markets, where productive resources are bought and sold. Workers sell their labor for income. People who own land loan it in return for rent. People who own capital exchange it for interest.

continued People spend their income in product markets, where producers offer goods and services for sale. Businesses receive payments for their products from consumers. They spend this income on natural resources, labor and capital to make more products. The business sector buys capital goods in the product markets to use in production.

continued The gov’t sector buys productive inputs in the factor markets to use in creating its goods and services. While gov’t receives some revenue from selling its services, most of its revenue comes from taxes. It also uses its revenue to buy final goods and services in the product markets. The foreign sector includes all the countries in the world. The U.S. buys from and sells to other countries.

Productivity and Economic Growth When a nation’s total output increases over time, the economy grows. This means the circular flow becomes larger. Productivity is a measure of the amount of output produced by a given amount of inputs in a specific period of time. It reflects how efficiently resources are being used.

continued Specialization can improve productivity. People, businesses and countries concentrate on the goods or services they can produce better than anyone else. We specialize because we earn more by doing the things we do well. It is also more efficient to specialize than to do everything for ourselves.

continued Division of labor is the breaking down of a job into separate, smaller tasks performed by different workers. It is a form of specialization, making use of differences in skills. Human capital is the sum of all the skills, abilities and motivation of people. When businesses invest in things like training and employee health care, worker productivity tends to increase.

continued Because of specialization, the American economy displays a high degree of economic interdependence. We rely on others and others rely on us, to provide the goods and services we consume. As a result, events in one part of the world can have an economic impact on other parts of the world.