What Is The Purpose Of An Economy? - The Freeman Online (2022)

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.

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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.

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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.

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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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What is the purpose of an economy? ›

Key Takeaways. An economy is a system of inter-related production and consumption activities that ultimately determine the allocation of resources within a group. The production and consumption of goods and services as a whole fulfill the needs of those living and operating within it.

Why economy is important for a country? ›

Economic growth increases state capacity and the supply of public goods. When economies grow, states can tax that revenue and gain the capacity and resources needed to provide the public goods and services that their citizens need, like healthcare, education, social protection and basic public services.

How are economies and governments linked? ›

The government (1) provides the legal and social framework within which the economy operates, (2) maintains competition in the marketplace, (3) provides public goods and services, (4) redistributes income, (5) cor- rects for externalities, and (6) takes certain actions to stabilize the economy.

When was the word economy invented? ›

economy (n.)

Meaning "frugality, judicious use of resources" is from 1660s. The sense of "wealth and resources of a country" (short for political economy) is from 1650s. economy (adj.) 1821 as a term in advertising, at first meant simply "cheaper," then "bigger and thus cheaper per unit or amount" (1950).

What is a simple definition of economy? ›

Definition of economy

(Entry 1 of 2) 1 : the structure or conditions of economic life in a country, area, or period also : an economic system. 2a : thrifty and efficient use of material resources : frugality in expenditures also : an instance or a means of economizing : saving.

What is economy one word answer? ›

An economy is a mechanism through which the scarce resources are prioritised and organised for the production of goods and services. Was this answer helpful?

How does economy affect society? ›

Economic growth affects government policy and spending

First and foremost, the economy affects how a government acts. Economic growth stimulates business and spending. Increased exports and imports lead to greater income from business taxes. In short, governments have an improved cash flow.

What does economy of a country mean? ›

The economy of a country or region is the system by which money, industry, and trade are organized.

Does the government control the economy? ›

The federal government regulates and controls the economy through numerous laws affecting economic activity. These range from laws enforcing private property rights to laws promoting competition among businesses.

How does the economy affect the government? ›

While outside events may influence economic activity, governments use economic means to enact changes as they see fit. This may include changes to tax policy, adjustments to the federal funds rate, fluctuations in the money supply, or alternations to government spending.

What is an example of an economy? ›

Economy is defined as the management of financial matters for a community, business or family. An example of economy is the stock market system in the United States. Careful management of wealth, resources, etc.; avoidance of waste by careful planning and use; thrift or thrifty use.

What is types of economy? ›

Economic systems can be categorized into four main types: traditional economies, command economies, mixed economies, and market economies.

What is the origin of the word economy? ›

Nearly every economist has at some point in the standard coursework been exposed to a brief explanation that the origin of the word "economy" can be traced back to the Greek word oikonomia, which in turn is composed of two words: oikos, which is usually translated as "household"; and nemein, which is best translated as ...

What affects an economy? ›

Economic factors affect the economy, including interest rates, tax rates, laws, policies, wages, and governmental activities. These factors are not directly related to the business but influence the investment value in the future.

What economy class means? ›

Economy class is another term for the airplane's main cabin, as opposed to premium cabins like business class and first class. Sometimes referred to as coach class, economy class typically makes up the bulk of the seating on a flight. It's the most simple class, with the fewest amenities.

How do humans affect the economy? ›

Human activities have a major impact on economic systems. Human activity includes human settlement and migration, the gathering of raw materials, and the manufacturing of finished products.

Which economy is better for society? ›

Capitalism is the greatest economic system because it has numerous benefits and creates multiple opportunities for individuals in society. Some of these benefits include producing wealth and innovation, improving the lives of individuals, and giving power to the people.

What is the role of the economy in social development? ›

In the economics study of the public sector, economic and social development is the process by which the economic well-being and quality of life of a nation, region, local community, or an individual are improved according to targeted goals and objectives.

Who controls the US economy? ›

Monetary policy is directed by the nation's central bank, known as the Federal Reserve Board, with considerable independence from the president and the Congress.. Regulation and Control. The U.S. federal government regulates private enterprise in numerous ways. Regulation falls into two general categories.

What is it called when the government controls the economy? ›

A command economy is an economic system where the government has control over the production and pricing of goods and services.

How does the government solve economic problems? ›

Fiscal policy uses the government's power to spend and tax. When the country is in a recession, the government will increase spending, reduce taxes, or do both to expand the economy. When we're experiencing inflation, the government will decrease spending or increase taxes, or both.

What makes a strong economy? ›

What is a strong economy? Firstly a strong economy implies: A high rate of economic growth. This means an expansion in economic output; it will lead to higher average incomes, higher output and higher expenditure.

What makes an economy grow? ›

Broadly speaking, there are two main sources of economic growth: growth in the size of the workforce and growth in the productivity (output per hour worked) of that workforce. Either can increase the overall size of the economy but only strong productivity growth can increase per capita GDP and income.

What are the 4 main reasons for economic growth? ›

The four main factors of economic growth are land, labor, capital, and entrepreneurship.

How is our economy? ›

In 2020, GDP (economic growth) in the U.S. was -3.40%, including the worst quarter of economic growth experienced since 1948 at a staggering -9.10% annualized. The year 2021 saw a turnaround on these figures, but this was coming off the low base of the year before.

Why is it important for the government to measure the economy? ›

GDP is important because it gives information about the size of the economy and how an economy is performing. The growth rate of real GDP is often used as an indicator of the general health of the economy. In broad terms, an increase in real GDP is interpreted as a sign that the economy is doing well.

Does economy mean money? ›

The economy of a country or region is the system by which money, industry, and trade are organized.

What is the economy problem? ›

An economic problem refers to any such problem in the economy that is concerned with the production of goods and services to satisfy the unlimited wants of the economy through the utilization of scarce resources.

What is structure of an economy? ›

Economic structure is a term that describes the changing balance of output, trade, incomes and employment drawn from different economic sectors – ranging from primary (farming, fishing, mining etc) to secondary (manufacturing and construction industries) to tertiary and quaternary sectors (tourism, banking, software ...

What is the best type of economy? ›

Market economies have little government intervention, allowing private ownership to determine all business decisions concerning how a business is run. This type of economy leads to greater efficiency, productivity, and innovation.

What is economics in your own words? ›

Economics is the study of scarcity and its implications for the use of resources, production of goods and services, growth of production and welfare over time, and a great variety of other complex issues of vital concern to society.

What are the benefits of economic growth? ›

High economic growth leads to increased profitability for firms, enabling more spending on research and development. This can lead to technological breakthroughs, such as improved medicine and greener technology. Also, sustained economic growth increases confidence and encourages firms to take risks and innovate.

How does economic planning help a country to improve and develop? ›

In most developing countries, information about the economy is scarce, and planning has provided the impetus to acquire and analyze the necessary data in order to provide a better understanding of the functioning of the economy.

Why is economic growth the most important objective? ›

Economic growth is an important macro-economic objective because it enables increased living standards, improved tax revenues and helps to create new jobs.

What are examples of economic benefits? ›

Net income and revenues, for example, are forms of economic benefit. Profit and net cash flow are also economic benefits. An economic benefit may also refer to a reduction in something such as a cost. For example, lower raw material or labor costs are economic benefits.

What affects economic growth? ›

There are three main factors that drive economic growth: Accumulation of capital stock. Increases in labor inputs, such as workers or hours worked. Technological advancement.

How can we improve our economy? ›

Six Ways to Create Economic Growth
  1. Promote economic growth through innovation. ...
  2. Strategic immigration reform. ...
  3. End the war on drugs. ...
  4. Require unemployed workers to volunteer. ...
  5. Cut health care costs. ...
  6. Remove unnecessary and unclear laws.
Jan 23, 2013

What are the main characteristics of economic planning? ›

Characteristics of economic planning are that it has predetermined and well defined goals.In this The central authority has the control,there is equal distribution of resources,the goals set are completed within specific period of time,Increase the production and employment and also reduce the population growth so its ...


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