A Vast Array

To illustrate the possibilities, consider the Shady Valley business sector.

• Corporations: OmniConglomerate, Inc. epitomizes the standard notion of a business firm. This corporation, owned by shareholders across the land, operates countless productive factories and employs thousands of workers. It combines resources to produce an assortment of products, ranging from athletic shoes to wireless telephone services, from automobiles to soft drinks. Other corporations doting the Shady Valley business landscape include The Wacky Willy Company, Quadra DG Computer Works, and Merciless Monolithic Media Masters, to name just a few.


• Proprietorships: On the other end of the size spectrum is owner-operated proprietorships like Phil Gardener, the home-based zucchini grower. Phil grows zucchini in his backyard garden plot, which he sells at the local farmers market. He also combines the four factors of production in this pursuit. Other proprietorships operating in the Shady Valley metropolitan area are Becky Carpenter, who fashions fabulous furniture in her garage, Dan Dreiling, who runs a profitable drywall installation business from his house, and Dr. Nova Cain, a purportedly painless provider of dental services.


• Partnerships: Schrumpmeyer and Schrumpmeyer, Attorneys at Law, exemplify the partnership form of jointly-owned business organization. Sally and Sean Schrumpmeyer provide legal services to the residents of Shady Valley. They also combine resources to produce their legal services. Other partnerships in Shady Valley are Tod and Randy, the Weberrific WebMasters who program websites, Unger Brothers Construction, jointly owned by brothers Efran, Antwon, and Quillan Unger, and Odyssey Business Consultants, run by two former executives of OmniConglomerate who decided to venture off on their own.

What It Does: Production

Production is the fundamental process of combining resources in such a way that the result is a more valuable commodity or service.

• Transformation: This process might involve, and often does, a physical transformation of materials. An example is transforming piles of iron ore, bauxite ore, silicate sand, and petroleum into a high-powered automobile.


• Transportation: However, the process might involve little more than the spatial relocation of commodities or materials. An example is shipping an automobile to a car dealership.

What It Does: Investment

The investment activities of the business sector suggest two related notions--investment and investment expenditures. While these two terms might seem identical, and are occasionally used synonymously, there is a difference.

• Investment: This is the generic term for the sacrifice of current consumption to enhance future production capabilities. Such investment can involved the acquisition of capital goods by the business sector or activities undertaken by the household sector, such as attending college. In particular, some investment acts might not involve expenditures by the business sector.


• Investment Expenditures: This is a more specific term meaning actual expenditures by the business sector on capital goods such as factories and equipment. These expenditures are used to purchase a share of gross domestic product. The official government measure of investment expenditures is gross private domestic investment.

A Word or Two About the Other Three

• Household Sector: This sector includes the entire, wants-and-needs-satisfying, eating, breathing, consuming population of the economy. In a word, it includes everyone, all consumers, all people, and every member of society. Pollyanna Pumpernickel, a hardworking mother of two, is a representative member of the household sector. So too is Winston Smythe Kennsington III, an affluent corporate executive.


• Government Sector: This sector includes all government entities that impose resource allocation decisions, that might not be made otherwise, on the rest of the economy. It consists of the three primary levels--federal, state, and local--responsible for passing and enforcing laws. Of course, all branches and agencies of the U.S. Federal Government--Congress, Department of Transportation, Environmental Protection Agency--are part of the government sector. So too is the Shady Valley City Council and the local Shady Valley Board of Education included in the government sector.


• Foreign Sector: This sector is comprised of everyone and everything outside the political boundaries of the domestic economy. It includes households, businesses, and governments in other countries. The foreign sector of the domestic United States economy includes the governments of other nations such as the hypothetical Republic of Northwest Queoldiolia. It also includes citizens and businesses in other nations, such as Horst Duncanstein, a citizen of Northwest Queoldiolia, and Quedoldiolian Sundial Company, also located in Northwest Queoldiolia.

Selling to All Sectors

• Household Sector: The Shady Valley business sector produces a number of goods directly for household consumption. This list is wide and varied, including Hot Momma Fudge Bananarama Ice Cream Sundaes, Quadra 9000 computers, Wacky Willy Stuffed Amigos, OmniCola, Dr. Nova Cain's dental services, and much more.


• Business Sector: Firms in the business sector purchase capital goods from other firms in the business sector. Computers produced by Quadra DG Computer Works are valuable capital goods used by most businesses in the Shady Valley area, including The Shady Valley Gazette-Tribune-Journal (to publish the daily newspaper), Becky Carpenter (to design furniture), and even OmniConglomerate (for data processing). Of course, businesses capital also includes buildings and equipment. Becky Carpenter also fashions office furniture then finds its way into a business environment.


• Government Sector: The OmniDefense division of OmniConglomerate is a prime military contractor, providing a wide assortment of goods purchased directly by the U.S. government. These goods range from uniforms to rifles to heavy artillery. In addition, many federal, state and local government agencies purchase computers from Quadra DG Computer Works, wireless telephone services from Digital Distance, and even an occasional zucchini from Phil Gardener.


• Foreign Sector: Firms in the Shady Valley business sector also sell goods beyond the political boundaries of the country. Wacky Willy Stuffed Amigos are exported world wide--to folks in the foreign sector. The same can be said for cars produced by the OmniMotors division of OmniConglomerate. The fabulous furniture fashioned by Becky Carpenter has also been found in foreign lands.

Connecting to the Circular Flow

The Circular Flow

A basic representation of the circular flow is displayed to the right. The four components of this simple model are: household sector, business sector, product markets, and resource markets. The household sector at the far left contains the consuming population of the economy. The business sector at the far right includes all of the producers.

The product markets at the top of the flow direct production from the business sector to the household sector in exchange for payment flowing in the opposite direction. The resource markets at the bottom of the flow direct factor services from the household sector to the business sector in exchange for payment flowing in the opposite direction.