Sunday, 2 August 2015

About Four basic economic activities

Any economy is a result of and is always engaged in four basic economic activities to sustain, develop and prosper itself. They are:

  • Production,
  • Distribution,
  • Consumption and
  • Capital formation.
These are the backbone of any economy. These economic activities create the wealth and purchasing power for economy. They lead to capital formation also. 

We can't consume most of the goods in their raw form. It requires processing, refining, shaping, mixing, tanning, manufacturing, cultivating and many other procedures to make the resources consumable by human beings. All these are done through production. So, production utilises the available resources to produce the required outputs to meet the needs of people. We always need production to satisfy our needs for existence.

Distribution involves in the passage of goods and services from one hand to the other or from producer to consumer through exchange or transfer. It involves intermediary agents also in the process. It may include bequeathing of assets, transfer of charity funds, subsidies and free social welfare services, all that imply economic values.

Consumption is the result of our desires and wants and it requires the goods that are produced to satisfy its urgency levels. So, consumption implies production in most cases. There are very few uneconomic goods that can be satisfied without production activity like free water, free air.
Consumption is an unending activity. We always need something to satisfy most of our recurring wants on daily basis. So, there will be an unending consumption activity in any economy at any given point of time. It is a continuous process which again requires continuous production of goods and services.

Capital formation takes place when large quantities of goods and services are produced which may result in accumulation of stocks and wealth. Further, production uses the factors of land, labour and capital resulting in wealth distribution to these factors in return for their use or services mostly in the form of rent, wages, interest and any other form of income. This income is used for consumption and balance income is again reinvested in assets and stocks to form capital for future usage.

So, you are able to see that there are four basic economic activities in a society which impact the economic position and development of any economy in our world..

Let us have a deeper look into each of these activities in our next chapters.

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