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BUSINESS: A profit-motivated organization that combines resources for the production and supply of goods and services. The term business is often used synonymously with the term firm. If there is any difference, and a subtle difference at that, the term business usually refers to a productive organization that is privately owned and motivated by the pursuit of profit. A firm, in contrast, could also refer to nonprofit and/or publicly controlled productive organizations. But this distinction is quite subtle and for most economic analyses the terms firm and business are used interchangeably. Profit-motivated businesses are organized as either a proprietorship (1 owner) with unlimited liability, a partnership (2 or more equal owners) with unlimited liability, or a corporation that issues limited liability stock ownership shares.

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MACROECONOMIC MARKETS:

Three sets of markets that make up the macroeconomy--product, financial, and resource--which exchange the three primary types of macroeconomic commodities--gross production, legal claims, and factor services. The four macroeconomic sectors--household, business, government, and foreign--interact through these three sets of markets. The primary objective of macroeconomic theories is to explain activity that takes place in these three sets of markets.
The three groups of macroeconomic markets that form the foundation of macroeconomy are the product markets, the financial markets, and the resource markets. Each set of markets exchange a different type of commodity important to the economy. The product markets exchange final goods and services, or gross domestic product. The financial markets exchange legal claims, or financial instruments. The resource markets exchange factor services, or the services of the four factors of production--labor, capital, land, and entrepreneurship.

What They Are

Each of the three groups of macroeconomic markets are commonly aggregated into theoretical constructs that combine the activity in hundreds of thousands of individual microeconomic markets. These three aggregated macroeconomic markets are characterized by the basic types of commodities exchanged.
  • Product Markets: The product markets, also termed goods or output markets, exchange the production of final goods and services, what is formally termed gross domestic product. The buyers of this production are the four macroeconomic sectors--household, business, government, and foreign. The seller of this production is primarily the business sector. A substantial part of macroeconomics is devoted to explaining how and why gross domestic product exchanged through the product markets rises or falls. When Duncan Thurly purchases a Deluxe Club Sandwich from Manny Mustard's House of Sandwich, he is operating through the product market.

  • Financial Markets: The commodity exchanged through financial markets is legal claims. Legal claims, or financial instruments, represent ownership of physical assets (capital and other goods). Because the exchange of legal claims involves the counter flow of income, those seeking to save income buy legal claims and those wanting to borrow income sell legal claims. When Winston Smythe Kennsington III buys a few hundred shares of OmniConglomerate, Inc. corporate stock, then he is operating in the financial markets.

  • Resource Markets: The services of the four factors of production--labor, capital, land, and entrepreneurship--are traded through resource markets. Resource markets, also termed factor markets, are used by the business sector to acquire the factor services needed for production. Payment for these factor services then generate income received by the household sector, which owns the resources. When Pollyanna Pumpernickel takes a job working at the Wacky Willy factory assembling Wacky Willy Stuffed Amigos, then she is participating in the resource markets. Note only factor services are exchanged through factor markets, not the actual factors.

Buyers and Sellers

The four macroeconomic sectors take part in each of the three sets of markets in various ways. Consider which sectors are the primary buyers and sellers for each market.
  • Household Sector: The household sector is the primary participant on the buying side of the product markets. This sector regularly purchases almost two-thirds of all gross domestic product exchanged through the product markets. This sector, in that it owns all resources, is also on the selling side of the resource markets. In fact, the income that it uses to purchase gross domestic product comes from selling factor services through the resource markets. Lastly, the household sector is on the buying side of the financial markets. When it buys legal claims, it is lending (or saving) income.

  • Business Sector: The business sector is THE primary participant on the selling side of the product markets. This is the sector responsible for production. However, it also purchases capital goods through the product markets, meaning it operates on both the selling side and the buying side. This sector is also on the buying side of the resource markets. It acquires the factor services used for production from the household sector through the resource markets. Lastly, the business sector is largely on the selling side of the financial markets. When it sells legal claims, it is borrowing income that is more often than not used to purchase capital goods.

  • Government Sector: The government sector participants on the buying side of the product markets along with the household and business sector. The government acquires a portion of gross domestic product in the course of pursuing its designated functions. This sector also surfaces on the selling side of the financial markets. If often sells legal claims to raise funds needed to pay for the purchase of gross domestic product.

  • Foreign Sector: The foreign sector participants in the product markets, on both the buying side and the selling side. When goods are exported from the domestic economy, the foreign sector is on the buying side of the product markets. When goods are imported into the domestic economy, the foreign sector is on the selling side of the product markets.

A Circular Flow of Activity

The Circular Flow
Circular Flow
The product, financial, and resource markets represent conduits of exchange activity among the household, business, government, and foreign sectors. In other words, commodities flow through these markets from sector to sector in a continuous, circular fashion. A standard circular flow model is presented in the exhibit to the right.
  • Household Income: The income received by the household sector at the far left is generated by selling factor services to the business sector. This income is then used to purchase goods produced by the business sector.

  • Business Revenue: The revenue received by the business sector at the far right is generated by selling production to the other sectors, especially the household sector. This revenue is then used to buy the factor services supplied by the household sector.

  • Government Taxes, Borrowing, and Spending: The tax revenue collected by the government sector in the center of the exhibit from the household sector is used to purchase output from the business sector through the product markets. The government sector also pays for a portion of these purchases with household sector saving that is borrowed through the financial markets. The resulting business sector revenue is then used to pay for factor services which becomes income that the household sector uses for taxes and saving.

  • Foreign Exports and Imports: The imports sold by the foreign sector at the very top to the domestic economy generates revenue that is often used to purchase exports from the domestic economy.
Around and around and around it goes. Activity flows from sector to sector through each of the three markets.

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Recommended Citation:

MACROECONOMIC MARKETS, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2014. [Accessed: August 27, 2014].


Check Out These Related Terms...

     | product markets | financial markets | resource markets | macroeconomic sectors | macroeconomic problems | macroeconomic theories |


Or For A Little Background...

     | macroeconomics | market | demand | supply | macroeconomic goals | production | government functions | factors of production |


And For Further Study...

     | household sector | business sector | government sector | foreign sector | circular flow | business cycles | economic system | capitalism | four estates | unemployment | inflation |


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