September 25, 2023 

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INFLATIONARY GAP: The difference between the equilibrium real production achieved in the short-run aggregate market and full-employment real production the occurs when short-run equilibrium real production is more than full-employment real production. An inflationary gap, also termed an expansionary gap, is associated with a business-cycle expansion, especially the latter stages of an expansion. This is one of two alternative output gaps that can occur when short-run production differs from full employment. The other is a recessionary gap.

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Markets that exchange final goods and services, that is, the output that is combined into 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 product markets rises or falls. Product markets, also termed output or goods markets, are one of three primary sets of macroeconomic markets. The other two are resource markets and financial markets.
Product markets take center stage in the macroeconomic analysis of the economy. First and foremost, product markets provide a direct indication of the level of aggregate output, or gross domestic product. This also suggests how and why the level of aggregate output changes as the economy moves through the ups and downs of business cycles. Furthermore, the product markets indirectly shed a little light on the macroeconomic problems of inflation and unemployment.

Gross Production

The product markets exchange final goods and services, what is commonly specified as gross domestic product. Definitionally speaking, gross domestic product is the total market value of all final goods and services produced in the domestic economy over a given period.

The product markets only exchange final production. They exclude raw materials or intermediate goods that are subject to further processing before resold. They also exclude the services of the factors of production, which are exchanged through the resource markets, and financial assets, which are exchange through the financial markets.

Buyers and Sellers

The demand side of the product markets is commonly and conveniently categorized by the particular macroeconomic sector making the expenditure--household, business, government, and foreign. The corresponding expenditures made by these four sectors are consumption expenditures, investment expenditures, government purchases, and exports.
  • Household Consumption: The household sector undertakes consumption expenditures for consumer goods. This is the vast majority of aggregate production that is used to satisfy wants and needs. The acquisition of consumer goods by the household sector is the ultimate goal of economic activity.

  • Business Investment: The business sector makes investment expenditures on capital goods, which add to the economy's production capabilities. Investment expenditures tend to be the most volatile expenditure running through the product markets.

  • Government Purchases: The government sector is responsible for government purchases of goods used to pursue assorted government functions such as national defense, education, and law enforcement.

  • Foreign Exports: The foreign sector purchases exports through the product markets. Exports are goods produced by the domestic economy and purchased by the foreign sector.
The primary component on the supply side of the product markets is production of the business sector. However, the foreign sector also contributes production by way of imports.
  • Domestic Business Production: The domestic business sector combines the four factors of production, which it acquires from the domestic household sector through the resource markets, to produce the overwhelming majority of the goods and services exchanged through the product markets.

  • Foreign Imports: The foreign sector also contributes goods and services to product markets through imports. Imports are goods produced by the foreign sector and purchased by the domestic economy. To focus attention on domestic production, the import component of supply is often subtracted from the export portion of demand to generate net exports.

One of Three

The product markets are one of three groups of macroeconomic markets. The other two are resource and financial.
  • 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. Note only factor services are exchanged through resource markets, not the actual factors.

  • Financial Markets: The commodities exchanged through financial markets are legal claims. Legal claims, or financial instruments, represent ownership of physical assets, capital, as well as 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.

The Circular Flow

The Circular Flow
Circular Flow
The product market is a key component of the circular flow model of the economy. The circular flow captures the continuous movement of production, income, and factor payments between producers and consumers.

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.

The circular flow indicates that the income used by the household sector to purchase goods through the product markets is obtained by selling factor services through the resource markets. It also indicates that the revenue used by the business sector to pay for factor services obtained through the resource markets is generated by selling goods through the product markets.

Aggregate Equilibrium

It is often convenient to combine the thousands of individual microeconomic product markets used to exchange a wide assortment of final goods and services throughout the economy into an abstract aggregation. Demand in the aggregate product market reflects the expenditures made by buyers in the individual markets. And supply in the aggregate product market reflects the total production sold in the individual markets.

Equilibrium in the aggregate product market is an essential aspect of macroeconomic analysis. In particular, overall macroeconomic equilibrium, which includes both short-run equilibrium and long-run equilibrium, requires aggregate product market equilibrium. This exists if total expenditures on gross domestic product is equal to the total amount of gross domestic product available.

However, this does not mean every individual product market is in equilibrium. One might have a bit of a shortage and another a bit of a surplus. As long as the shortages and surpluses balance out, meaning aggregate production is equal to aggregate expenditures, then the aggregate product market is in equilibrium


Recommended Citation:

PRODUCT MARKETS, AmosWEB Encyclonomic WEB*pedia,, AmosWEB LLC, 2000-2023. [Accessed: September 25, 2023].

Check Out These Related Terms...

     | macroeconomic markets | financial markets | resource markets |

Or For A Little Background...

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

And For Further Study...

     | business cycles | inflation | unemployment | macroeconomic sectors | household sector | business sector | government sector | foreign sector | circular flow | economic system | capitalism | macroeconomic problems | macroeconomic theories | shortage | surplus |

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