An economy is a place of collective production, circulation, distribution and exchange, and the interaction of diverse agents participating in the process. In its broadest sense, it is defined as ‘a social domain characterized by the existence of a marketplace or other economic activity’. In simple terms, the economies of the world are the places where goods, services and money are produced, processed, exchanged and consumed. Economies exist at the local, national and international levels. They are the places where the products that we use and need are produced and exchanged.
The modern economy has evolved through the interaction of millions of individual agents, each contributing to the overall performance and outcome of the economy. Each of us has an effect on the state of the economy, both directly and indirectly. Directly, we can influence the level of employment and production by spending our money, which in turn helps to increase demand for goods and services and, through the operation of the financial system, helps to reduce the costs of production. Indirectly, we can shape the course of economic development by using our economic decisions to invest, save, consume, invest, or emigrate.
Today, many people believe that the economy exists mainly within the formal sector. While the formal sector supports most of the economic activity, it is a relatively small part of the total economy. The informal economy, on the other hand, supports about a fifth of the Gross Domestic Product (GDP) of the nation. This means that informal economy refers to all forms of activity that are neither formally nor formally recognized, including the creation and the dissemination of information, the collection and disposition of data, the organization and management of exchange and marketplaces, the provision of services and the distribution of consumer goods. The informal economy constitutes a much larger portion of the economy than many people think.
The concept of economy was formalized after the Great Depression as economists started looking at the phenomenon of economies in a broader context. Instead of considering the goods produced within a country as being the economy, the focus was given on the activities of the market economy. This was later motivated by the French revolutionary thinker Louis Pasteur, who postulated that every economy contained a distinct micro-economy made up of a number of different economy components operating within a general economy. According to him, these components operate in parallel but interact very effectively when they are brought into contact with one another.
Microeconomics is the study of what happens within the skeleton of a larger economy. The scope of microeconomics is quite broad and includes price movements, production and consumption, allocation of resources, marketing and advertising, government regulation and access to finance. macroeconomics refers to the study of how the economy influences the environment. This can be done through the means of national accounting, the coordination of economic policies and programmes and the monitoring of economic growth. These different aspects of macroeconomics have various implications on the type of political system that is prevailing within a country.
Gross Domestic Product (GDP) is one of the most important indicators of the health of the economy. Growth of the economy is determined by the ability of a nation to produce on a timely basis with a high degree of efficiency and adaptability. When the level of GDP is high, there is a strong level of investment and economic activity. This will in turn boost the growth rate of the economy. Conversely, when the level of GDP falls, there will be a low level of investment and economic activity and vice versa.
Purchasing Managers Index (PMI) is a measure of economic activity including the gross domestic product. When it increases, this indicates that the economy has bought more from other producers and the demand for imported goods are increased as well. Conversely, when the PMI decreases, there is a drop in the demand for imported goods and business activity starts to decline. This index can also show a fall in the inflation rates as prices of goods increase more than the economy.
The business cycle is an important economic indicator of how the state of the economy is developing. This is determined by the business cycle that is influenced by a variety of economic factors such as interest rates, unemployment, inflation and business cycles. Some economists believe that the business cycle has been broadly misunderstood and the business cycle reflects business activity only in part of economic indicators. In order to understand the full extent of the effects of business on economy, various other economic measures are used such as Consumer Price Index (CPI), Purchasing Managers Index (PMI) and Producer Price Index (PPI).