An economy is a specific area of the exchange, production and distribution of goods and services, by different actors. In simple terms, it’s defined as a social domain characterized by the practices, discourses, and physical manifestations related to the exchange of goods and services. Economists and other economic experts use the term to determine the level and trend of overall economic performance in a country or region. They also study how different economic policies affect the economy. If we will take into consideration the current scenario of the economy, several issues emerge that need to be addressed to avoid any major shocks to the system.
Several theories on the causes of economic growth have been developed over the years. The classical theory is known as the Laffer curriculum theory, according to which free-market economies can successfully promote economic growth provided that the market is left to its own devices. This theory also states that there are some limitations for the laissez-faire policy, especially when government intervention is introduced. Control economies, on the other hand, are believed to occur when some form of regimentation is introduced to ensure the correct functioning of the economy.
Two main schools of economic thought, monetarily liberal and centrally planning, argue that an economy can exist with only a minimal amount of regulations on its distribution and activities. According to monetarily liberal economists, economic growth is caused by demand-side factors such as savings, investment, demand management, technology diffusion, openness, and competition, while supply-side factors like taxes, tariffs, price controls, subsidies, trade protectionism, and centralization contribute to economic slowdown. Centralized planning, on the other hand, is linked to the political economy. It refers to the direction and management of a nation’s economy through the involvement of numerous political institutions. Economists disagree on the extent to which monetarily liberal or centrally planning theories are compatible with each other. Some believe that a purely liberal economy relies too much on market forces to achieve its goals, while others believe that it fails to take into account the role of government.
In the study of economics, the two main approaches used to analyze the relationship between the economy and politics are macroeconomics and microeconomics. Microeconomics attempts to analyze the interactions and relationships of the economy in the context of a larger context. For instance, microeconomists focus on the decisions of households, firms, government agencies, and international bodies. Macroeconomists focus on macroeconomic policies pursued by a country as a whole, including its interaction with other countries.
Microeconomics studies the movement of markets, production and consumption within a particular economy. It studies how households spend their money, how firms invest their profits, and how governments protect their domestic currency and finances. A simple economy operates with a high level of unit exchange rates because its central goal is to promote capital formation. Exchanging units of one currency for another can be accomplished quickly and economically by the central economic body. A unit exchange rate is the price that a firm is allowed to charge for the use of a certain unit of another nation’s currency.
The process of Unit exchange directly relates to the distribution of income and wealth in a society. The distribution of income and wealth is determined by the value of the services or products offered by households and businesses. The value of a service or product, also known as the factor price, is the amount households and businesses are willing to pay for it. The distribution of wealth, also known as wealth creation, occurs when the value of the factor price less the value of the household’s and businesses’ goods and services minus the value of the government’s goods and services. This process also determines the size and shape of the economy.
Mixed economic systems are complex systems that exhibit characteristics of both a traditional economy and a nontraditional economy. These types of economies are characterized by flexibility, a high degree of unpredictability, extensive markets, a tendency toward excess production, limited capacity for external investment, and high levels of taxation. In mixed economic environments, the traditional economies tend to exhibit some characteristics of a traditional economy while the nontraditional economies tend to exhibit characteristics of a nontraditional economy. Examples include traditional farming and customary village-based economy where the production is largely local and household-based, state-based or regional economies where the economy is largely localized, or international economies where the economy is largely national or global. In most cases, mixed economic environments tend to have a marked degree of unpredictability because of the inherently complex and uncertain process of creating, distributing, and regulating the economies.
The United States economy exhibits some characteristics of mixed, traditional economies. The United States economy, although largely based on traditional farming and family-based production has developed a more globalized character because of its historic interactions with other countries and the ensuing need to regulate and control domestic activities. Although the United States remains the largest overall producer of goods in the world, the country has been forced to change its patterns of distribution to respond to the changes in the international markets and to maintain high levels of productivity.