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Economy

The production, consumption, trade and distribution of goods and services

What is the Economy?

The economy is the production, consumption, trade, and distribution of goods and services. Every economy is characterized by its own unique values, culture, education as well as legal and political systems. When referring to an economy, it is also important to consider supply and demand, as well as the labor and capital that are needed to produce goods and services.

 

Economy

 

Related Terms and Definitions

  • Economic agents: An entity, such as an individual, household, organization, or government, that makes decisions that influence the economic system.
  • Open economy: A term that refers to an economic system that engages in trading goods and services with other countries through importing and exporting goods.
  • Closed economy: A term that refers to an economic system where there is no international trade.
  • Global economy: A term that refers to the world’s economy as a whole.
  • New economy: A term that describes the emergence of high-growth industries. The use of technology in such economies spurs economic growth and activity, such as the internet.
  • Microeconomics: An area of economics that is focused on the implications of individuals, households, and businesses when they make decisions in regards to the use and allocation of resources.
  • Macroeconomics: An area of economics that is focused on how an overall economy functions on a large scale, such as national income and unemployment levels.

 

Economic Measures

The following are examples of economic measures that determine if an economy is doing well or not:

  • Gross Domestic Product (GDP): Refers to the total monetary value of all goods and services produced in a country in a specific period of time. GDP is one of the most significant economic indicators because it provides an idea about the economic health of a country.
  • Consumer Price Index (CPI): Measures the change in the average prices of goods and services bought by consumers in a specific country. Changes are measured for goods and services that are divided into distinct baskets, such as food, clothing, education, transportation, and more.
  • Unemployment rate: Measures how many people in a country are unemployed, but are actively seeking work, available to work, and are of working age.

 

Types of Economic Systems

There are many types of economic systems around the world. The four economies described below are one of the most common types:

 

1. Traditional

The traditional system is the oldest type of economic system that is built on the basis of traditional values and ideologies. It is centered around tribes and families who work in occupations such as fishing, hunting, and farming.

As a result, individuals in a traditional economic system tend to consume the goods that they produce themselves. Therefore, there is no trading in this economic system. Nowadays, most traditional economies are located in developing countries.

 

2. Command

The command economy is another type of economic system where the government maintains a monopoly in the market. The government holds the power to decide what goods and services to produce and in what quantity.

The pricing of the goods and services and the rules of the market are also established by the government. As a result, there is no competition in a command economic system because the government is the only entity that is in control of production.

 

3. Market

The market economic system is completely different than a command economic system because the government does not control the market. The control lies in the hands of individuals and businesses because this economic system depends on supply and demand. As a result, individuals and businesses are the ones who will determine the pricing and quantity of goods and services that should be produced.

 

4. Mixed

A mixed economic system combines elements from the above economic systems. For example, the pricing of goods and services will be determined by individuals and businesses due to the laws of supply and demand, but the government still plays a role by intervening in the market with price ceilings.

 

Additional Resources

CFI is the official provider of the Certified Banking & Credit Analyst (CBCA)® certification program, designed to help you become a professional financial analyst. These additional resources will also be very helpful in advancing your career and learning:

  • Economic Indicators
  • Imports and Exports
  • Microeconomics
  • Price Floors and Ceilings

Financial Analyst Certification

Become a certified Financial Modeling and Valuation Analyst (FMVA)® by completing CFI’s online financial modeling classes!