Understanding Economic Activity: Production, Distribution, and Consumption

What is economic activity?

Economic activities are all the processes used to obtain the goods and services that people need. The three phases of economic activity are:

• Production → is all the goods and services which are created as a result of an economic activity.
• Distribution → is the process of moving goods and services from the place of production to the consumer.
• Consumption → is all the goods and services that people buy to satisfy their wants and needs.

History of payment

• Barter → direct exchange of goods
• Natural coins → valuable natural items, with an agreed value like shells, cocoa, salt, furs
• Metal coins → the first metal coins were made in Lidia (present-day Turkey) in the 7th century BC
• Paper money → notes first appeared in 11th century China, and were used as a property certificate. Not used in the West until the 16th century
• Bills of exchange and cheques → appeared in Europe in the late Middle Ages. Changed through banks, the signature of the proprietor and the name of the addressee are required.
• Plastic and electronic money → credit and debit cards appeared in the 20th century. Used to buy goods and services without using cash

What are economic sectors?

• Primary sector → consists of activities which obtain food and raw materials from the environment.
  • Agriculture
  • Livestock
  • Fishing
  • Mining
• Secondary sector → consists of economic activities which transform raw materials into finished products.
  • Industry
• Tertiary sector → consists of many different activities which provide a service to society, but do not produce tangible goods.
  • Services

Who contributes to economic activity?

1. People → They participate in production and they also consume the goods and services.

2. Companies → produce goods and services for a profit. To do so, they need the work of people. In exchange for their work, people receive wages. There are different types of companies. They can be classified by ownership and by size:
Ownership: a company is state-owned if it is owned by the government; public or private. There are two types of privately-owned companies. Sole proprietorships are companies owned by one person. Limited companies have various owners.
Size: This can refer to either the number of workers, profits and incomes.

3. The state
Establish rules to govern economic activity.
Help the private sector with subsidies and aid.
Create companies in sectors that are strategic or are in trouble.
Provide public services and, if necessary, purchase goods and services to do this.
Generate jobs for public services and their workers.

What makes production possible?

Natural resources
The production process uses natural resources, such as water, animals, minerals and fossil fuels.
Resources can be renewable or non-renewable.

Capital
There are three types of capital

• Physical capital → consists of tangible assets: buildings, machinery, computer equipment and so on.
• Human capital → is a worker’s knowledge, experience and training. Increased skills and experience result in increased productivity. So continuous training is important.
• Financial capital → consists of the money used to start or maintain a business activity. Sometimes business owners need loans or government subsidies to do this.

Technology
Methods and procedures used to produce goods and services can be manual, mechanical or automated.
Technology is critical to economic growth. Technological advances help companies:

• To increase production and productivity
• To save on labour costs;
• To create new goods and more profitable methods of production.

Knowledge and know-how
A country’s economic growth depends on people with knowledge. To achieve a modern, competitive economy, a country must have centres for research and a quality education system. Workers must be well trained to do their jobs and develop new ideas. Know-how is the set of skills (techniques, business practices) necessary to carry out an activity.

Work
Work is both physical and intellectual. It is necessary to produce goods and services. It is the main activity and source of income for the majority of the population.
The productivity of a worker is measured by the amount of goods and services he or she can produce in one day. Nowadays work can often be done outside the workplace, usually at home: it is often called ‘teleworking’.

What are the three phases of economic activity?
Are production, distribution and consumption

Which forms of payment are most common in Spain today? Would it be possible to use the other forms?
The forms of payment that are most common in Spain today are; plastic and electronic money, bills of exchange and cheques, paper money and metal coins.