PAUL A. BORG B.A. (Hons) Econ., Dip. Lab. Stud.

Economics Course
Unit 1: Production
Text (2010 Ed.)

1.1 The Meaning and Structure of Production

1.2 The Output
1.3 The Inputs
1.4 Summary

This Unit covers the following parts of the SEC 10 syllabus (2010):
1.2. The factors of production
Candidates should be able to:
 illustrate knowledge about production and factors of production.
1.3. Different classification of goods
Candidates should be able to:
 identify and explain different types of goods.
2.1. Stages of production
Candidates should be able to:
 distinguish between primary, secondary and tertiary stages of production;
 assess their importance in the economy.

1.1 The Meaning and Structure of Production

In everyday language, we use the term ‘production’ to mean the making of visible or tangible
things such as furniture, clothing, food, items of stationery, etc. In economics, this term has a
much wider meaning. For economists, production consists of all those activities that provide the
goods and services to satisfy wants. Thus the process of production is not complete when a
carpenter finishes manufacturing a table. This table still has to be transported to warehouses and
then to retail outlets thus engaging the efforts of many other workers in offices, ships, docks, ports,
railways, road transport, banks, insurance agencies, warehouses, and shops. The process of
production is only complete when consumption starts, i.e. when a buyer acquires the ownership of
the table to use it for oneself or one’s household.
We can, thus, divide the process of production into three stages:
 The Primary stage is also called the Extractive stage since it is carried out by industries
that extract the gifts of nature from the earth’s surface, from beneath the earth’s surface,
and from the seas and oceans. This stage includes activities such as agriculture, farming,
fishing, quarrying, mining, oil extraction and the timber industry.
 The Secondary stage is also called the Manufacturing and Construction stage since it
processes the output of the Primary stage (raw materials) into finished products. This stage
includes activities such as building, engineering, and the manufacture of cars, furniture,
clothing, etc.
 The Tertiary stage is also called the Services stage. This includes the distributive trades
such as wholesaling and retailing, the commercial trades such as banking,
communication, transport and insurance and personal services such as education,
hairdressing, law, administration, medical services and so on.

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Primary (%) Secondary (%) Tertiary (%)

Malta 1974 7 34 60
Malta 2006 3 22 75
Burkina Faso 2005 49 6 45
Source: Annual Abstract of Statistics - Malta, 1976 (pp. 81, 230), NSO News Release 39/2007; (for Malta);
http://www.oecd.org/dataoecd/26/19/38561773.pdf (for Burkina Faso).

Table 1.1: Sectoral GVA for Malta & Burkina Faso

Table 1.1 above shows the sectoral Gross Value Added (GVA) for Malta in 1974 and in 2006. The
GVA is the value of the output of the goods and services produced in the country during that year.
Thus in 1974, 7% of all the output of goods and services produced in Malta was produced by the
Primary sector. This percentage decreased to 3% in 2006. It may be seen from the table above that
the contribution of the secondary sector also decreased whilst that of the tertiary sector increased.
The contribution of each sector to the whole economy is a measure of the importance of that
sector to the economy of the country. It is measured by dividing the GVA of that sector by the total
GVA for the economy and multiplying the answer by 100 to express it as a percentage. This
contribution may also be measured by the number of people working in each sector or by the value
of capital (machinery, buildings, etc.) in each sector.
When we compare these figures to that of a country such as Burkina Faso, where the GVA per
person ranks much further down than that of Malta’s, we see that there are very big differences.
Sectoral share of GVA (Malta) Sectoral share of GVA (Burkina Faso)

1
3% 2
22%
3
1 1 1
45%
49% 2
2
3 3
3 2
75% 6%

Source: NSO News Release 39/2007; (for Malta); http://www.oecd.org/dataoecd/26/19/38561773.pdf (for Burkina Faso).
Fig 1.1(a): Sectoral GVA for Malta Fig 1.1(b): Sectoral GVA for Burkina Faso
Comparing Fig.s 1.1(a) and (b), we see that the contribution of the primary sector in a developing
country such as Burkina Faso is much higher than that of Malta while the tertiary sector is much
smaller. These situations are typical of most developed and developing countries.
Developed countries are so called because they have developed (used up) their natural resources, i.e.
they can no longer use the Primary sector as their means of livelihood. Thus they must look at the
Secondary and Tertiary sectors of the economy to keep up their standard of living. In the past, this huge
development of a country’s natural resources led to these countries colonising other countries to open
up other sources for the output of the primary sector. Nowadays, modern developed countries realise
that their main input is the skills of their people and thus invest in an education system that prepares
workers mainly for occupations in the Tertiary stage of production.

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1.2 The Output

The process of production results in a variety of output. This output is classified by economists
into goods and services. Goods consist in the visible or tangible output of the production process.
They are the output of the primary and secondary stages and consist in things such as tables,
machines, cars, footballs, bridges, ships, biros, etc. Services consist in the invisible or intangible
output of the production process. They are the output of the tertiary stage and consist in things
such as retailing, insurance, hairdressing, education, etc. The term commodities is used to refer
collectively to goods and services.
Goods are subdivided into consumer goods and producer goods.
Consumer goods are those that are wanted for their own sake (they satisfy our wants directly).
They are then further subdivided into:
 Non-durable consumer goods are items which are consumed (used up) in the act of being
used; some examples are food, soap, heating, lighting, and cigarettes.
 Durable consumer goods are items which are consumed a bit at a time; some examples
are books, domestic furniture, cars, kitchen utensils, and television sets.
Producer goods (also called capital goods) are not wanted for their own sake but for the
production of other goods (both consumer and other producer goods) and services. They include
such things as photocopiers, cranes, tractors, cruise liners, factory buildings, industrial machines,
delivery vans and so on.
Services are subdivided into Personal (Direct) and Commercial (Impersonal or Indirect) services.
Personal services are those that are given directly to the person who wants them. Thus, for
example, when you want a hair cut, you cannot send someone else to do it for you but you yourself
have to go. Other examples of personal services are medicine, education and beauty treatment.
Commercial services are those that may either be given directly to the person requiring them or
to someone else acting on his/her behalf. Commercial services are further subdivided into:
 Distributive trades, which include exporting, importing, wholesaling and retailing and
 Aids to Trade, which include finance, banking, transport, communication, insurance and
warehousing.
The following chart summarises the classification of the output of the production system.
Output

Goods Services

Consumer goods Producer goods Persona Commercial

l

Durable Non-durable Trade Aids to Trade

consumer goods consumer goods
Fig. 1.2: The classification of output

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1.3 The Inputs

The process of production has to start with inputs or resources. These include such obvious things
as human skills, farms, factories, fishing boats, soil, forests, and shops. The term factors of
production refers to these inputs into the system of production.
These factors of production are classified into four (4) types:
 Land (or natural resources)
 Labour (or human resources)
 Capital (or artificial resources)
 Entrepreneurship (human resources with a difference)
LAND is a term used to describe all those natural resources which people may buy and sell and
which may be used for the production of goods or services. Some land is replaceable, which
means that we can grow more of it, for example cotton, wool, timber, foodstuffs while other land
is non-replaceable, which means that once used we’ll have less of them, for example coal, iron
ore, minerals, and oil. When economists refer to the conservation of natural resources they do
not mean that we should not use them but that land should be used more efficiently, i.e. we should
make every effort to get a greater value of output per unit of input. Recycling is a strategy that may
be used to conserve land. Recycling refers to schemes for the recovery of natural materials (both
replaceable and non-replaceable) for future use.
LABOUR is an economic term that refers to human effort (physical and mental) which is directed
to the production of goods and services. Labour is mostly seen as human skills and, in this light, it
is not a homogenous factor, i.e. no one worker is exactly the same as another. Workers have
different skills and different attitudes to work and finding the right person for the right job is not
an easy task at all.
CAPITAL is a non-natural (artificial) resource. We have already referred to it as producer goods
and the same examples apply here. Capital, thus, is a term that refers to such things as industrial
machinery, factory buildings, cranes, and so on. The term does NOT refer to money or to wealth.
Money is simply a means by which we can exchange goods and services. The term wealth refers
to the stock of all those goods (both consumer goods as well as producer goods) that have a money
value.
Capital may be classified into:
Working capital (circulating capital) changes its form in the process of production and moves
from stage to stage. It consists of the stocks of raw materials, partly finished goods, and finished
goods (stocks) held by producers;
Fixed capital: does NOT change its form in the course of production but remains the same - it is
‘fixed'. It consists of equipment, machinery, buildings, railways, ships and so on.
Capital accumulates (increases) when society ends up with more machines, more factories and so
on. Capital accumulation requires saving and the diversion of resources.
Saving is the act of NOT using resources to produce consumer goods. The Diversion of
Resources is the act of using the unemployed resources to produce producer goods. In money
terms, thus, when we ‘save’ it means that we are not using our money to buy consumer goods but
holding it. Firms may then borrow this money to finance the construction of producer goods
(capital). This latter act is the diversion of resources.
Fixed Capital may also wear out. If Malta produced 1,000 machines in 2007 this does not
necessarily mean that society has 1,000 machines more since some of the previous machines may
have worn out or become obsolete and need to be replaced. The amount or value of machines to be
replaced is called depreciation or replacement investment. The total amount of machines
produced in one year is called gross investment. The difference between the two is net
investment. This is the actual amount or value by which the stock of capital has accumulated
(increased). The following equation may help to clear things up:
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Net Investment = Gross Investment - Depreciation

ENTREPRENEURSHIP refers to the functions of organisation, management and risk-bearing.
The entrepreneur is seen as that person (or persons) who brings together the other factors of
production, organises and manages them and bears the risk of the enterprise not being successful.
Entrepreneurship is promoted by the Government of Malta through a public corporation (see Unit
4) called Malta Enterprise, which was set up in 2003. The Malta Enterprise Act, 2003 is also
meant to “encourage the establishment of new business undertakings and the expansion of existing
business undertakings in Malta” and to “provide for the development and administration of
incentives, schemes and other forms of support for such ventures.”

Fig. 1.3: The logo of Malta Enterprise - www.maltaenterprise.com

In 2007, the Maltese Government also published a three-year Industry Strategy for Malta calling
for “the educational curriculum, across all its tiers, … to be such that it instils in Maltese children
and youth creativity, innovation and risk-taking which are so essential for inculcating an
entrepreneurial culture.”

1.4 Summary
The production system, like any other system, is made up of three elements, i.e. Input – Process –
Output. The inputs are the Factors of Production while the output consists in Goods and
Services. The process refers to the three stages of production, i.e. the primary, secondary and
tertiary stages or sectors. The following diagram is a short summary of this Unit.

INPUT PROCESS OUTPUT

Land Primary Goods

Labour Secondary Services
Capital Tertiary
Entrepreneurship

Paul A. Borġ B.A. (Hons) Econ. Dip. Lab. Stud. , 2008

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