Professional Documents
Culture Documents
What Is an Economy?
An economy is a complex system of interrelated production, consumption, and
exchange activities that ultimately determines how resources are allocated
among all the participants. The production, consumption, and distribution of
goods and services combine to fulfill the needs of those living and operating
within the economy.
An economy may represent a nation, a region, a single industry, or even a family.
KEY TAKEAWAYS
An economy is a system of inter-related production and consumption
activities that ultimately determine the allocation of resources within a
group.
The production and consumption of goods and services as a whole fulfill the
needs of those living and operating within it.
Market-based economies, also called free market economies, are self-
regulated, allowing goods to be produced and distributed in response to
demand from consumers.
Command-based economies are regulated by a government body that
determines the goods which are produced, their quantities, and the price
paid for them.
In the modern world, few economies are purely market-based or
command-based.
Understanding Economies
An economy encompasses all of the activities related to the production,
consumption, and trade of goods and services in an entity, whether the
entity is a nation or a small town.
No two economies are identical. Each is formed according to its own
resources, culture, laws, history, and geography. Each evolves
according to the choices and actions of the participants.
These decisions are made through some combination of market
transactions and collective or hierarchical decision-making.
Types of Economies
In the modern world, few nations are purely market-based or purely
command-based. But most lean toward one or the other of these models.
Market-Based Economies
Market-based or "free market" economies allow people and businesses to
freely exchange goods and services according to supply and demand.
Through these decisions, the laws of supply and demand determine prices
and total production. If consumer demand for a specific product increases,
production tends to increase to satisfy the demand. The increased demand
causes prices to rise until consumers balk and cut back on their purchases.
Demand for the product will then decline and prices will decline with it.
Command-Based Economies
Command-based economies depend on a central government that controls
the production levels, pricing, and distribution of goods.
Mixed Economies
Pure market economies rarely exist in the modern world since there's usually
some degree of government intervention or central planning. Even the United
States could be considered a mixed economy. It may not mandate production
but it has ways to influence it. For example:
China had a command economy only until 1978 when it began a series of
reforms that encouraged private enterprise.
Studying Economies
The study of economies and the factors affecting economies is called
economics. The discipline of economics can be broken into two major areas
of focus, microeconomics, and macroeconomics.
Microeconomics
Microeconomics studies the behavior of individual people and businesses in
order to understand why they make the economic decisions they do and how
these decisions affect the larger economic system.
Macroeconomics
As the name implies, macroeconomics studies the big picture.
Economic Indicators
As noted above, macroeconomics is the study of the big picture and that
picture is incomplete without a set of economic indicators. These are some of
the most closely-watched of those indicators.
The gross domestic product of the United States was about $23 trillion in
2021.
Unemployment
The Unemployment Report estimates the number of people who are working
for pay during a given period. More importantly, the number is tracked over
time in order to determine whether unemployment is worsening.
The BLS also publishes a key inflation report for the U.S. The Consumer
Price Index tracks the costs of goods and services from month to month. It
breaks down its report into the vital areas of consumer spending, such as
food, energy, and rent costs.
The U.S. had a balance of trade deficit in 2021 of about $859.1 billion, up
$182.4 billion from the previous year, according to the U.S. Bureau of
Economic Analysis.
During the 19th century, the development of technology and the growth of
international trade created stronger ties among countries, a process that
accelerated into the Great Depression and World War II. After 50 years of the
Cold War, the late 20th and early 21st centuries have seen a renewed
globalization of economies.
What Is Economics?
Economics is a branch of the sciences that seeks to understand the way a
population functions by studying the way its economy functions. Every group
of people develops a survival plan based on shared labor and resources.
How they do that, and how well they succeed at it, is the study of economics.