Are You Struggling to Understand the Principles of an Economy?

Economics is a social science. It is a study of production, distribution, and consumption of goods and services. Students pursuing economics face real-life challenges to understand complicated principles. In modern days, most students pursue a degree program in economics as it provides them a general understanding of the world and lends relevant insights into its inner workings.

In 2017, LinkedIn placed economics in the second position in their rankings of professional premium. This is because economics graduates earn an average of £9,800 in professional jobs.

Before understanding the complex theories of economics, it is essential to understand the term economics in detail.

Let us discuss in detail the intricacies of an economy.

What does Economy mean to You?

An economy is an area of production, distribution, trade, consumption of products and services.

In a broader sense, the economy refers to a social domain that emphasises the practices, material expressions, and discourses associated with the production. It is associated with the use and management of resources.

Various business units producing good using natural sources, labour and capital engage in economic activity. Various individuals, businesses, organisations, or governments can be economic agents. Economic transactions take place when two parties agree to the value of the transacted good or service.

What are the Factors Affecting an Economy?

By trying to assess the factors affecting the economy, we aim to determine the factors that influence the economic growth of a country or a system.

The term economic growth refers to economic progress and advancement. The economic growth of a country is marked by an increase in the market price of goods and services produced by an economy over a span of time.

Economists usually state that economic development and the growth of a country are influenced by the factors: physical capital, natural resources, human capital, and technology.

Let us have a look at the factors that affect the economy. Improving or increasing the number of these factors can lead to significant growth in the economy:

• Physical Capital: Increased investment in physical capital or infrastructure such as factories, machinery and roadways will reduce the cost. It will also increase the efficiency of economic output. Better factories and machinery are more productive than physical labour. Higher productivity can increase the output and lead to an increase in its GDP.

• Natural Resources: The exploration and discovery of natural resources like oil, or mineral deposits boost economic growth. It occurs due to the shift or increase in the Production Possibility Curve of the country. It is rather challenging to increase the quantity of natural resources in a country. Countries should be able to reach an equilibrium regarding the supply and demand for scarce natural resources to prevent them from depleting.

• Human capital: An increase in the investment of human capital of a country can improve the quality of the labour force. It would result in the improvement of skills, abilities, and training. A skilled labour force has a pivotal effect on economic growth as skilled labourers yield productive results.

• Technology: One of the most influential factors affecting the economic growth of a country is the improvement of technological resources. Technology can increase productivity by implementing the same level of labour. It accelerates the economic growth and the development of a country. This signifies that factories can be more efficient and productive at lower prices. The appropriate use of technological resources can most likely lead to sustained long-run development of the economy.

These factors affect the rate of economic growth and development of a country.

What are the Different Types of Economies?

Experts believe that every economy in the world is unique in some way. No two economies are identical. The way in which scarce resources are distributed within the economy determines the type of economic system. However, these economies do share numerous similar features and characteristics. Over the years, Economists have been able to identify four different types of economy- traditional, command, market and mixed economy.

Let us learn about each of these economies in details:

• Traditional: As the name suggests, a traditional economy is based on the traditional approach. These economies are based on primitive rules and are the most basic types of economies. Traditional economies tend to concentrate on agriculture, cattle herding, and fishing, etc.  The barter system is used in the traditional economy. These economies believe in producing the quantities they require. They find it unnecessary to produce any surplus. No concept of trading exists. Societies having this type of economy tend to be very close-knit and socially satisfied. This type of traditional economy exists in developing and underdeveloped countries. Traditional economies are still prevalent in some parts of Africa and the Middle East.

• Command Economy: The opposite of a free market economy is the command economy. In such an economy, there exists one central power, i.e., the government. The government makes all economic decisions. It determines the prices of the commodities (instead of market forces).  Such an economy is the characteristic trait of a communist country. Countries like China, Cuba, and the previous USSR are examples of command economies.

• Market Economy: A free market economy depends completely on the free market and free market trends. There is no interference from the government or no exercise of any controlling power. There are no regulations imposed on buyers and sellers. The participants of the economy and the laws of demand and supply determine the economy. In theory, a free market can lead to high growth levels. It creates an imbalance of wealth. In such a scenario, the rich people get richer, and poor people get poorer. Presently, the United States is the epitome of capitalism.

• Mixed Economy: A mixed economy system is a combination of different types of economic systems. This type of economy is a cross between the market economy and the command economy. The market is more or less free from government regulations, except for a few pivotal areas like transportation or sensitive industries like defence. The idea that works behind a mixed economy is to use the best of both worlds, such as incorporate policies that are both socialist and capitalist. Countries like India and France have mixed economic systems.

These are the four types of economic systems having different characteristics and features. Click here to know more.

What are the Sectors of an Economy?

The economy of a nation can be divided into different sectors to define the portion of the population engaged in different activities. The sectors of the economy are as follows:

• Primary: The primary sector of the economy extracts or harvest products like raw materials and basic foods. These can include renewable as well as non-renewable sources. In the developing and developed countries, a low proportion of workers are involved in the primary sector. However, improved technology and the development of energy sources have led to a decline in this sector.

• Secondary: The secondary sector manufactures products from raw materials extracted by the primary sector. All manufacturing, processing, and jobs of construction are included in this sector. In the United States, less than fifteen percent of the working population is engaged in the activities of the secondary sector.

• Tertiary: The tertiary sector is widely known as the service industry. It involves the retail of manufactured products. It also provides services like banking and insurance. In the 20^th century, the service sector developed due to improved labour productivity and high disposable income. In the United States, about 80 percent of the labour force consists of tertiary workers.

• Quaternary: This sector consists of intellectual activities that are often associated with technological innovation. Activities of this sector include libraries, government, education, research and IT. These activities lead to technological advancement that can have an impact on both short-term and long-term economic growth.

• Quinary: This sector incorporates top executives or officials in fields such as government, science, universities, health care, culture, and media. It might include police and fire departments. Economists also include domestic activities in the quinary sector. Click here to know more.

How the Economy Works Well?

The economy of various countries works differently. To understand how the economy operates, you can have a look at the following features of the US economy:

• GDP: GDP is used to measure the growth of the U.S. economy. The economy enters a recession when the GDP turns negative.  This has occurred throughout the history of U.S. recessions. The significant part of the economy is consumer spending. The other three are business expenditures, net exports, and government spending. Presently, China and the European Nations have outpaced the current GDP statistics of US.

• Supply and Demand: Supply and demand are two forces that govern the U.S. economy. Demand rules about 70% of the economy of the country.

• Inflation and Deflation: The US government measures the current inflation rate with the use of the Consumer Price Index. Deflation occurs when the prices fall. This results in stock crashes and economic crisis. Deflation is worse than inflation. It can severely restrict the growth rate of an economy.

• Fiscal policy: The federal budget includes $4 trillion of the fiscal policy. Fiscal policy can stimulate or guide the economy towards growth and prosperity. The president starts the budgetary procedure every year, but the Congress has the government spending authority. Spending outpaces revenue and creates a budget deficit, which is added to the national debt every year.

• Monetary Policy: Federal Reserve controls the monetary policy of the U.S. The Federal Reserve tools include the fed funds rate, money supply and the use of credit. These tools control the way interest rates affect the economy.

• Trade policy: Trade policy affects import and export costs by regulating trade agreements with other countries. American Free Trade Agreement seeks to reduce the trade costs and cause an increase in the GDP of each country. These factors make the US economy work. Click here to know more about it.

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