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What is economic activity?

Updated on · By Ahmad Nasrudin Tag:

Economic activities
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Economic activities refer to various activities to meet the needs and wants, and they involve money. Those activities include production, distribution, and trade, and consumption in the economy over a specified period. In aggregate, you can see changes in economic activity from real domestic product (real GDP) growth.

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What are the main objectives of economic activities

Meeting the needs and wants is the primary goal of economic activity. They involve many activities, such as production, distribution, and trade.

Businesses produce goods and services to meet demand. Some of them provide products to other companies, either as capital goods, semi-finished products, or finished products. And, the others offer consumer products to households and individuals.

Individuals need goods and services to survive. Products and services are also essential for a better lifestyle and standard of living.

Why economic activity continues to develop

Demand for goods and services would increase along with population growth. Not only that, but it is also increasingly varied along with changes in consumer tastes and preferences. Growth and variations in the needs and the wants ultimately spur economic activity.

Individual’s needs and wants are unlimited because we are often unsatisfied with what is at present. Some items may meet the needs. But, we want something more, for example, sophisticated and innovative products.

Product innovation makes life more productive, comfortable, and accessible. You can take the example of a cell phone. It, for example, has been around for a long time to meet your communication needs.

But, you and other consumers want something more, not just for communication. You want one who can send pictures or embed a high-resolution camera. Then, there comes the smartphone. 

Such taste changes also apply to other products. Finally, new products continue to emerge, and their production increases. And, for reasons, economic activity develops along with efforts to meet our demands.

Scarcity and innovation

To meet our needs and wants, we face a scarcity of resources. Natural resources, time, and money are finite. It forces us to make choices.

The scarcity of resources pushes us to keep thinking. How to increase production? How to produce more sophisticated items with the same input? How to deliver goods cheaper. These questions require us to be more innovative and creative.

What are the types of economic activities

Economic activities include production, distribution, and trade. And, they involve money, either as a means of payment or as a store of wealth.

In aggregate, economists divide activity in the economy into four sectors.

  • Primary sector covers various businesses that produce raw materials. They produce output by extracting natural resources.
  • Secondary sector consists of various companies ranging from food and beverages to automotive. They utilize raw materials from the primary sector to produce intermediate goods and finished goods. Finished products will go to final consumption. And, intermediate goods need to be further processed to become the final output.
  • Tertiary sector comprises various services such as trade, banking, and insurance. In this sector, businesses offer a variety of non-information services.
  • Quaternary sector covers service companies providing information and knowledge. They include technology and information, consulting, communication, and research and development providers. Previously, this sector falls into the tertiary sector. But, as its contribution to the economy increased, economists began to separate it.

The role of money in economic activity

Economic activities involve cash. Even though we don’t use it directly to produce goods, money is vital in the modern economy. Every activity involves money, both in production, distribution, and trade.

Without money, we will be back to a barter economy. To get the item you want, you need to exchange it for another item. Sure, that’s difficult. You need to find the owner of the goods who want to trade with your products. Otherwise, the transaction will not take place.

But, with money, transactions become more comfortable. You simply hand over the money, and the goods belong to you.

Let’s take another example of why money is vital in modern economic activity.

Businesses pay wages with money. Their employees can then use it to shop or save it to accumulate wealth.

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With money, businesses can also buy inputs such as raw materials and capital goods. Sellers use their money to pay salaries, pay off debt, and distribute to shareholders (dividends). Not only that, but they also save part of it for capital (retained earnings).

So, I can say that the other motive for economic activity is making money and wealth. Money is not only a medium of payment. It is also a means for us to accumulate wealth by investing it in time deposits, stocks, and bonds.

How to measure economic activity

You can measure economic activity in a country with GDP indicators. GDP becomes the right measurement tool.

GDP represents the monetary value of goods and services from all economic activities in a country. It consists of manufacturing output, distribution services, trade services, and so on. In short, it represents the monetary value of the output produced by a country at a certain point in time.

The output is representing the production of goods and services. And, the production includes not only goods but also services. Higher output means that more products and services are produced, marketed, and traded on the market. And, if output growth falls, distribution, trade, and other activities also shrink.

Real GDP growth is the most important economic measure of a country’s economic activity. With a straightforward number, you can find out whether an economy has grown, shrunk, or stagnated.

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