LOMA 308 Module 1 Lesson 1: The Economy

Summary of Key Points

An economy includes all aspects of the production, distribution, and consumption of goods and services
within a local area, such as an individual neighborhood, city, province, territory, or state, a nation, which
includes the activities of all local areas, or multi-nation global areas.

Economies are divided into four primary sectors:

 Sector 1 (Raw Materials) function as the foundation of all economies by securing the land,
lumber, coal, gas and oil, minerals, and food needed for production and by supporting industries
such as agriculture, forestry, fishing and hunting, and mining.
 Sector 2 (Manufactured Goods) turn raw materials into finished products, such as machinery,
clothing, and packaged goods and make them available to consumers
 Sector 3 (Services) facilitate the transfer of finished goods to end users and enhance consumers’
lives through financial, legal, and healthcare services and through entertainment and media
 Sector 4 (Intellectual Property) improves the quality of life through education, government,
culture, the arts, and intellectual concerns such as scientific research and information
technology.

Most economies consist of four participant groups:

 Households that buy products and services, save and invest, and offer labor to businesses and
governments
 Businesses that produce products or services for households and governments and secure labor
from households
 Governments that buy goods and services, make transfer payments to individuals and
businesses, and provide public services such as education, utilities, and transportation
 Financial intermediaries that facilitate the transfer of funds between savers to borrowers

Economic markets facilitate exchanges between buyers and sellers of goods and services. Product
markets provide a way for buyers and sellers to exchange goods and services. Labor markets enable
household members to offer their labor to businesses and governments in return for wages and other
compensation. Financial markets manage the transfer of funds between borrowers and savers or
between investors and investment providers. Exchanges can be conducted directly or through financial
intermediaries. Money facilitates market exchanges by providing a medium for making and receiving
payment for products and services, a unit of account that determines the value of products and
services, and a store of value that ensures payments made and received have the same value.
Economists often use circular flow diagrams to illustrate how money flows through economies and to
track the movement of funds from one point in the system to any other point in the system.

Economists use a variety of measures to evaluate economic performance. Two of the most important of
these measures are the gross domestic product and the unemployment rate. The gross domestic

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product (GDP) measures how much a country produces in a year based on the market values, or prices,
buyers are willing to pay and the final goods that are consumed. It’s calculated as the sum of
consumption, investments, government purchases, and net exports. The nominal GDP can be adjusted
to provide information about changes in price levels (the real GDP), or to account for contributions
made by individual members of a population (the per capita GDP). The unemployment rate is the
percentage of people in the labor force who are without jobs but who are actively seeking work.

Over time, changes in the GDP and the unemployment rate create a pattern of changes in economic
activity. This pattern, which is called the business cycle, includes four phases: expansion, contraction,
recession, and recovery. Each of these phases can be affected by trends, which are movements in a
specific direction over time, or variations, which are changes in an established trend. Economist rely on
statistical variables known as economic indicators to forecast and monitor changes in the business
cycle.

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