What Is The Purpose Of An Economy?

What Is The Purpose Of An Economy

The economy is a critical set-up upon which society, as we know it today, is founded. Economics is the study of things like production, distribution, and the consumption of services and goods. It takes a look at how businesses, individuals, nations, and governments make decisions on the allocation of scarce resources to meet their needs and wants. It also seeks to determine which of the groups should coordinate and organize the efforts aimed at attaining maximum output. In the quest to understand the economy, a lot of questions have popped up. First and foremost, what is the purpose of the economy?

What is the purpose of an economy?

The economy is a measure of human production, consumption, and distribution of goods and services. The purpose of an economy would be to help in the distribution of earth’s resources such as water, food, minerals and water among people in such a sustainable manner. Because by nature, all humans are created to be equal and can exercise their rights as regards the resources. It should, however, be noted that the economy is far beyond money alone.  Currency and money are just conveyors or facilitators. This is supported by the fact that many things have been used over different periods as a means of transaction. Also, the fiat money we use today is not known to have any intrinsic value aside from the fact that it is government-backed. The government may be able to print as much money as it wants, but it is the ordinary people that determine the flow of the same.

It suffices to say that the economy is designed in such a way as to aid in the distribution of the resources of the earth.                                                                                                                

Understanding The Basics Of Economics

The concept of economics is one that dates back to a couple of centuries, the 8th century B.C to be precise with the Greek Poet Hesiod. It was he that wrote that materials, labor and time have to be properly distributed to avoid scarcity. There have however been subsequent works in this regard. The basic principle of economics is founded upon the fact that human beings have unlimited needs in a world where the means are limited. This is why the concepts of productivity are vital to economists. An increase in performance would mean an improved standard of living for all.

Some people are of the view that economics is a dismal science a school of thought of those who criticize the liberal views on social equity and race.

What Are The Types Of Economics?

There are two basic disciplines in the study of economics. They include microeconomics and macroeconomics.

Macroeconomics deals with the economy as a whole on an international and national scale. It has a focus on certain geographical regions, continents, and even the whole world. Some of the topics that are studied in macroeconomics include government monetary and physical policies, foreign trade, unemployment rates, interest and inflation rates, and the changes in the GDP.

Microeconomics, on the other hand, deals with how firms and consumers make certain decisions. Such people may be households, single persons, government agencies, and the likes. Microeconomics attempts to explain why the different aspects of human behavior respond to the changes in price and why humans demand what they do per time. It also takes a look at how individuals make certain financial decisions. The topics here range from the dynamics of demand and supply to the costs and efficiency associated with producing services and goods.

There is a connection between macroeconomics and microeconomics as has been established by studies made by economists. Having a better understanding of the dynamics of both topics should go a long way in helping us to make informed decisions.

What Are The Different Economic Systems?

Economic systems can be viewed from the way stuff is produced and allocated to people. For example, in an agrarian society, people will most likely produce what they need by themselves. In such a system, the people would hunt their meat, build their houses, make their clothes, and do everything themselves. This kind of system is often defined by limited division of labor and sees reciprocal exchange among family and community members.

With the evolution of civilization, there was an emergence of economies that were based upon production by social class such as slavery and feudalism. Feudalism was simply a system that had a class of nobles who owned the lands and then leased parts of it to peasants for farming purposes. The peasants, in turn, give most of their harvests to the lords in exchange for security and safety.

Capitalism System

Capitalism evolved at the onset of industrialization. It is simply defined as a production system where capitalists or business owners produce goods to sell them to make profits and not for personal use alone. In the capitalist system, the capitalists are the owners of the business and the tools required for production. In this system, workers are engaged in exchange for wages and the workers often do not own the product and tools used for the production. For instance, if you work in a shoe factory and you decide to take home one of the finished shoes, you will be seen as a thief even though you made it with your hands.

The capitalist system relies heavily on the market to be distributed and allocate the goods produced for selling purposes. A market is simply a place that brings together sellers and buyers. It is also a place where the prices of things are established as well as who gets what. A perfect example of a capitalist economy is America.

What Are The Alternatives To Capitalism?

In a quest to provide viable alternatives, the world has seen the rise in alternate systems of economy. The two most prominent systems of government created are communism and socialism.

Communism is simply an economic system where private ownership does not exist and is instead owned by the people of the society. In communism, a market system is not used; instead, a central planner that organizes things is the one that handles the production and distribution of resources.

Socialism, on the other hand, is a production system where businesses are owned collectively by workers. This means that they own the tools of production, the product, and even the profits. This system produces profits and uses the market for the distribution of services and goods. Co-operative societies are examples of such systems.

What Are The Different Economic Measures?

There are some concepts associated with the economy of a country. The concepts include GNP, exchange rate, consumer spending, GDP, interest rate, Stock market, the balance of trade, and unemployment.

The GDP is simply a measure of the size of any economy. The modern system of economic analysis heavily depends on certain economic indicators such as GDP and GDP per capita.     

What Is An Informal Economy?

This can be described as an economic activity that is neither monitored nor taxed by a government that contradicts the formal economic system. This economy is therefore not included in the gross national product of the economy. The informal economy is more often than not a common feature of developing countries even though all economies have some elements of the informal sector. 

Informal economic activities are a dynamic process that includes several aspects of the social and economic theory that includes regulation, exchange, and enforcement. Due to its nature, it is often quite difficult to study, define measure and observe. There is no single known source that defines the informal sector.

Some of the terms used when talking about this economy include under the table, underground and off the books. The black market often talks about a subset of the formal economy. Usually, the informal sector makes up a large part of the economies of developing countries. The major challenge is that is most times stigmatized and quite troublesome. The informal sector provides a lot of economic opportunities for the poor and has seen rapid expansion since the 1960s. This thus makes it imperative to seek ways to integrate the formal sector into the mainstream economy.     

What Is The Purpose Of International Economic Policies And Theories?

The primary purpose of economic theories is to explain and predict. These theories seek to isolate the important points when predicting and explaining certain events. International economic theories often assume two-commodity, two-nations, and two-factor world. This theory also assumes that there is no restriction to trade with an ideal mobility factor.


The importance of the economy is one that cannot be overemphasized. This is mainly because the economy helps us to determine demands and supply with a mandate to create a balance and ensure the flow of scarce resources. One begins to wonder why with all the studies carried out there is still lack and want in many parts of the world. It suffices to say that the subject of economics is one that would continually be studied for a long time to come because the issues are continually evolving in nature.

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