Economy

It is generally accepted that people worry about love, the weather, and the economy. Actually, not necessarily in that order.

In the 21^st century the economy is the foremost concern for most of us. Government deficits, taxes, unemployment, and rising prices are consistently at the top of our collective list of worries.

Interest in the workings of the economy intensifies when we have some immediate stake in its performance. The loss of a job, for example, can rivet one’s attention on the causes of unemployment. A tuition increase may start you thinking about the nature and causes of inflation. And high rents can start you thinking about the demand for housing in relation to its supply.

For many people, of course, concern for the economy goes no further than the price of tuition or the fear of losing a job. Many others, however, are becoming increasingly aware that their job prospects and the prices they pay are somehow related to national trends in prices, unemployment, and economic growth.

Despite the widespread concern for the economy, few people really understand how it works.

In seeking to figure out how the economy works, it is useful to start with a simple truth – namely, that the economy is us. “The economy” is simply an abstraction that refers to the sum of all our individual production and consumption activities. What we collectively produce is what the economy produces; what we collectively consume is what the economy consumes. In this sense, the concept of “the economy” is no more difficult than the concept of “the family.”

Thus, the economy is very much a part of our everyday lives. Hence, to understand it is to understand our own economic behaviour, both individually and collectively.

We spend much of our lives working to produce the goods and services that flow from our factories and offices. We spend a good part of the remaining time consuming those same goods and services. And during much of the time left over, we worry about what to produce or consume next. Even such simple things as reading books, going to school, and lying on the beach can be described as economic activities.

Economy is often defined as the relationship between production, trade and the supply of money in a particular country or region.

In more basic terms, an economy is a mechanism that allocates scarce resources among competing users.

This mechanism achieves three things:

• What (What goods and services will be produced and in what quantities?)

• How (How will the various goods and services be produced?)

• For whom (For whom will the various goods and services be produced?)

The way a society answers these basic questions is known as its economic system. Economic systems may be classified as traditional, command, or market systems. As the names suggest, resources are allocated (distributed) in a traditional economy according to tradition and in a command economy by government planners. Resources in a market economy are allocated according to the laws of supply and demand.

In many modern economies the what, how, and for whom choices are made by households, firms, and government, and they are coordinated through markets. Governments influence these choices by taxing, subsidizing, regulating, and lawmaking. In recognition of the role played both by command and market coordination mechanisms, these economies are referred as mixed economies.

Thus, a mixed economy is one that uses both market and command mechanisms to coordinate economic activity.

Economic systems can also be classified as closed and open.

A closed economy is one that has no links with any other economy. The only truly closed economy is that of the entire world.

An open economy is one that has economic links with other economies. Firms in an open economy export some of their production to other countries, rather than selling only to households within their own country.