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Economy

An economy consists of the economic systems of a country or other area; the labor, capital and land resources; and the manufacturing, production, trade, distribution, and consumption of goods and services of that area.

A given economy is the end result of a process that involves its technological evolution, history and social organization, as well as its geography, natural resource endowment, and ecology, as main factors. These factors give context, content, and set the conditions and parameters in which an economy functions.

A market based economy may be described as a spatially limited social network where goods and services are freely produced and exchanged according to demand and supply between participants (economic agents) by barter or a medium of exchange with a credit or debit value accepted within the network. Capital and labor can move freely across places, industries and firms in search of higher profits, dividens, interests, and compensations and benefits. Rent on land allocates this generally fixed resource among competing users.

Contemporary Capitalism is a market economy in which most of the production capacity is owned and directed by the private sector. Government role is limited to provide for defense and internal security; administer justice and prisons; make laws and regulations; enforce contracts, laws and regulations; correct market imperfections and failures; ensure full employment without inflation; promote balance economic growth and development; provide for the poor, children, and elderly; protect and assist in emergencies and natural disasters; provide basic opportunities to all members of society; prevent future calamities and disasters; and, pursue national goals established by society at large such as protection of the environment and natural resources.

On the other hand, tradicional socialism is a command-based economy in which markets and the free exchange of goods and services, as well as manufacturing, production, trade and distribution are replaced or done by government central planning and state owned enterprises. In this economy all private owners of capital (called capitalist) and of land (called landowners) are not allowed or banned; and the only permitted private ownership is of consumption goods. Capital and land are assigned by the state and movement of labor is severely restricted. There are no profits, dividends, interest or rent. Labor compensation and benefits are decided by central planners.

Finally, a mixed economy contains elements of both capitalism and socialism which means a market based economy with a varied degree of government central planning and state owned enterprises.

Contents


Range

Today the range of fields of study examining the economy revolve around the social science of economics, but may include sociology (economic sociology), history (economic history), anthropology (economic anthropology), and geography (economic geography). Practical fields directly related to the human activities involving production, distribution, exchange, and consumption of goods and services as a whole, are engineering, management, business administration, applied science, and finance.

All professions, occupations, economic agents or economic activities, contribute to the economy. Consumption, saving, and investment are variable components in the economy that determine macroeconomic equilibrium. There are three main sectors of economic activity: primary, secondary, and tertiary.

Due to the growing importance of the financial sector in modern times,[1] the term real economy is used by analysts[2][3] as well as politicians[4] to denote the part of the economy that is concerned with actually producing goods and services,[5] as ostensibly contrasted with the paper economy, or the financial side of the economy,[6] which is concerned with buying and selling on the financial markets. Alternate and long-standing terminology distinguishes measures of an economy expressed in real values (adjusted for inflation), such as real GDP, or in nominal values (unadjusted for inflation).[7]

Etymology

The English words "economy" and "economics" can be traced back to the Greek words , i.e. "one who manages a household", a composite word derived from ("house") and ("manage; distribute"); ("household management").

The first recorded sense of the word " conomy" is in the phrase "the management of conomic affairs", found in a work possibly composed in a monastery in 1440. "Economy" is later recorded in more general senses, including "thrift" and "administration".

The most frequently used current sense, denoting "the economic system of a country or an area", seems not to have developed until the 19th or 20th century.[8]

History

Ancient times

As long as someone has been making, supplying and distributing goods or services, there has been some sort of economy; economies grew larger as societies grew and became more complex. Sumer developed a large scale economy based on commodity money, while the Babylonians and their neighboring city states later developed the earliest system of economics as we think of, in terms of rules/laws on debt, legal contracts and law codes relating to business practices, and private property.[9]

The Babylonians and their city state neighbors developed forms of economics comparable to currently used civil society (law) concepts.[10] They developed the first known codified legal and administrative systems, complete with courts, jails, and government records.

Several centuries after the invention of cuneiform, the use of writing expanded beyond debt/payment certificates and inventory lists to be applied for the first time, about 2600 BC, to messages and mail delivery, history, legend, mathematics, astronomical records and other pursuits. Ways to divide private property, when it is contended... amounts of interest on debt... rules as to property and monetary compensation concerning property damage or physical damage to a person... fines for 'wrong doing'... and compensation in money for various infractions of formalized law were standardized for the first time in history.[9]

Greek drachm of Aegina. Obverse: Land turtle / Reverse: (INA) and dolphin. The oldest turtle coin dates 700 BC
Greek drachm of Aegina. Obverse: Land turtle / Reverse: (INA) and dolphin. The oldest turtle coin dates 700 BC

The ancient economy was mainly based on subsistence farming. The Shekel referred to an ancient unit of weight and currency. The first usage of the term came from Mesopotamia circa 3000 BC. and referred to a specific mass of barley which related other values in a metric such as silver, bronze, copper etc. A barley/shekel was originally both a unit of currency and a unit of weight... just as the British Pound was originally a unit denominating a one pound mass of silver.

For most people the exchange of goods occurred through social relationships. There were also traders who bartered in the marketplaces. In Ancient Greece, where the present English word 'economy' originated, many people were bond slaves of the freeholders. Economic discussion was driven by scarcity.

Middle ages

In Medieval times, what we now call economy was not far from the subsistence level. Most exchange occurred within social groups. On top of this, the great conquerors raised venture capital (from ventura, ital.; risk) to finance their captures. The capital should be refunded by the goods they would bring up in the New World. Merchants such as Jakob Fugger (1459 1525) and Giovanni di Bicci de' Medici (1360 1428) founded the first banks. The discoveries of Marco Polo (1254 1324), Christopher Columbus (1451 1506) and Vasco da Gama (1469 1524) led to a first global economy. The first enterprises were trading establishments. In 1513 the first stock exchange was founded in Antwerpen. Economy at the time meant primarily trade.

Early modern times

The European captures became branches of the European states, the so-called colonies. The rising nation-states Spain, Portugal, France, Great Britain and the Netherlands tried to control the trade through custom duties and taxes in order to protect their national economy. The so-called mercantilism (from mercator, lat.: merchant) was a first approach to intermediate between private wealth and public interest. The secularization in Europe allowed states to use the immense property of the church for the development of towns. The influence of the nobles decreased. The first Secretaries of State for economy started their work. Bankers like Amschel Mayer Rothschild (1773 1855) started to finance national projects such as wars and infrastructure. Economy from then on meant national economy as a topic for the economic activities of the citizens of a state.

The industrial revolution

The first economist in the true meaning of the word was the Scotsman Adam Smith (1723 1790). He defined the elements of a national economy: products are offered at a natural price generated by the use of competition - supply and demand - and the division of labour. He maintained that the basic motive for free trade is human self interest. The so-called self interest hypothesis became the anthropological basis for economics. Thomas Malthus (1766 1834) transferred the idea of supply and demand to the problem of overpopulation. The United States of America became the place where millions of expatriates from all European countries were searching for free economic evolvement.

The Industrial Revolution was a period from the 18th to the 19th century where major changes in agriculture, manufacturing, mining, and transport had a profound effect on the socioeconomic and cultural conditions starting in the United Kingdom, then subsequently spreading throughout Europe, North America, and eventually the world. The onset of the Industrial Revolution marked a major turning point in human history; almost every aspect of daily life was eventually influenced in some way. In Europe wild capitalism started to replace the system of mercantilism (today: protectionism) and led to economic growth. The period today is called industrial revolution because the system of Production, production and division of labour enabled the mass production of goods.

After World War II

After the chaos of two World Wars and the devastating Great Depression, policymakers searched for new ways of controlling the course of the economy. This was explored and discussed by Friedrich August von Hayek (1899 1992) and Milton Friedman (1912 2006) who pleaded for a global free trade and are supposed to be the fathers of the so called neoliberalism. However, the prevailing view was that held by John Maynard Keynes (1883 1946), who argued for a stronger control of the markets by the state. The theory that the state can alleviate economic problems and instigate economic growth through state manipulation of aggregate demand is called Keynesianism in his honor. In the late 1950s the economic growth in America and Europe often called Wirtschaftswunder (ger: economic miracle) brought up a new form of economy: mass consumption economy. In 1958 John Kenneth Galbraith (1908 2006) was the first to speak of an affluent society. In most of the countries the economic system is called a social market economy.

Economic phases of precedence

The economy may be considered as having developed through the following Phases or Degrees of Precedence.

  • The ancient economy was mainly based on subsistence farming.
  • The industrial revolution phase lessened the role of subsistence farming, converting it to more extensive and mono-cultural forms of agriculture in the last three centuries. The economic growth took place mostly in mining, construction and manufacturing industries. Commerce became more significant due to the need for improved exchange and distribution of produce throughout the community.
  • In the economies of modern consumer societies phase there is a growing part played by services, finance, and technology the (knowledge economy).

In modern economies, these phase precedences are somewhat differently expressed by degrees of activity.

  • Primary stage/degree of the economy: Involves the extraction and production of raw materials, such as corn, coal, wood and iron. (A coal miner and a fisherman would be workers in the primary degree.)
  • Secondary stage/degree of the economy: Involves the transformation of raw or intermediate materials into goods e.g. manufacturing steel into cars, or textiles into clothing. (A builder and a dressmaker would be workers in the secondary degree.) At this stage the associated industrial economy is also sub-divided into several economic sectors (also called industries). Their separate evolution during the Industrial Revolution phase is dealt with elsewhere.
  • Tertiary stage/degree of the economy: Involves the provision of services to consumers and businesses, such as baby-sitting, cinema and banking. (A shopkeeper and an accountant would be workers in the tertiary degree.)
  • Quaternary stage/degree of the economy: Involves the research and development needed to produce products from natural resources and their subsequent by-products. (A logging company might research ways to use partially burnt wood to be processed so that the undamaged portions of it can be made into pulp for paper.) Note that education is sometimes included in this sector.

Other sectors of the developed community include :

  • the Public Sector or state sector (which usually includes: parliament, law-courts and government centers, various emergency services, public health, shelters for empoverished and threatened people, transport facilities, air/sea ports, post-natal care, hospitals, schools, libraries, museums, preserved historical buildings, parks/gardens, nature-reserves, some universities, national sports grounds/stadiums, national arts/concert-halls or theaters and centers for various religions).
  • the Private Sector or privately-run businesses.
  • the Social sector or Voluntary sector.

Economic measures

There are a number of ways to measure economic activity of a nation. These methods of measuring economic activity include:

GDP

The GDP - Gross domestic product of a country is a measure of the size of its economy. The most conventional economic analysis of a country relies heavily on economic indicators like the GDP and GDP per capita. While often useful, it should be noted that GDP only includes economic activity for which money is exchanged.

Informal economy

An informal economy is economic activity that is neither taxed nor monitored by a government, contrasted with a formal economy. The informal economy is thus not included in that government's Gross National Product (GNP). Although the informal economy is often associated with developing countries, all economic systems contain an informal economy in some proportion.

Informal economic activity is a dynamic process which includes many aspects of economic and social theory including exchange, regulation, and enforcement. By its nature, it is necessarily difficult to observe, study, define, and measure. No single source readily or authoritatively defines informal economy as a unit of study.

The terms "under the table" and "off the books" typically refer to this type of economy. The term black market refers to a specific subset of the informal economy. The term "informal sector" was used in many earlier studies, and has been mostly replaced in more recent studies which use the newer term.

Micro economics are focused on an individual person in a given economic society and Macro economics is looking at an economy as a whole. (town, city, region)

Largest economies by GDP in 2011

List of 30 Largest Economies in Nominal GDP in 2011 by the International Monetary Fund[11][12] List of 30 Largest Economies in GDP (PPP) in 2011 by the International Monetary Fund[13][14]
Global Rank G20 Rank Country GDP (billions of USD) Share of Global GDP
World 70,011.680 100.00%
1 17,960.206 25.65%
1 2 15,064.816 21.52%
2 3 6,988.470 9.98%
3 4 5,855.383 8.36%
4 5 3,628.623 5.18%
5 6 2,808.265 4.01%
6 7 2,517.927 3.60%
7 8 2,480.978 3.54%
8 9 2,245.706 3.21%
9 10 1,884.903 2.69%
10 11 1,843.382 2.63%
11 12 1,758.680 2.51%
12 1,536.479 2.19%
13 13 1,507.402 2.15%
14 14 1,185.215 1.69%
15 15 1,163.847 1.66%
16 858.282 1.23%
17 16 834.335 1.19%
18 17 763.096 1.09%
19 665.898 0.95%
20 571.567 0.82%
21 18 560.294 0.80%
22 531.758 0.76%
23 529.046 0.76%
24 504.612 0.72%
25 479.297 0.68%
26 475.052 0.68%
27 19 435.179 0.62%
28 425.091 0.61%
29 20 422.037 0.60%
30 358.080 0.51%
Remaining Countries 9,127.980 13.04%
Rank G20 Rank Country GDP (billions of USD) Share of Global GDP
World 78,852.864 100.00%
1 15,788.584 20.02%
1 2 15,064.816 19.10%
2 3 11,316.224 14.35%
3 4 4,469.763 5.67%
4 5 4,395.600 5.57%
5 6 3,089.471 3.92%
6 7 2,376.470 3.01%
7 8 2,309.138 2.93%
8 9 2,253.585 2.86%
9 10 2,216.769 2.81%
10 11 1,828.601 2.32%
11 12 1,659.016 2.10%
12 13 1,556.102 1.97%
13 1,413.027 1.79%
14 14 1,391.114 1.76%
15 15 1,122.638 1.42%
16 16 1,054.560 1.34%
17 930.236 1.18%
18 17 918.978 1.17%
19 886.489 1.12%
20 766.675 0.97%
21 18 710.690 0.90%
22 706.710 0.90%
23 19 677.663 0.86%
24 622.914 0.79%
25 20 555.340 0.70%
26 516.181 0.65%
27 489.436 0.62%
28 467.670 0.59%
29 447.595 0.57%
30 415.132 0.53%
Remaining Countries 12,224.261 15.50%

Economies with the largest contribution to global economic growth from 1996 to 2011

List of 20 Largest Economies by Incremental Nominal GDP from 1996 to 2011 by the International Monetary Fund[15][16] List of 20 Largest Economies by Incremental GDP (PPP) from 1996 to 2011 by the International Monetary Fund[13][17]
Rank Country GDP (billions of USD) Share of Global Incremental GDP Annualized GDP Growth
World 39,555.368 100.00% 8.7%
8,590.950 21.72% 6.1%
1 7,226.341 18.27% 6.1%
2 6,132.386 15.50% 47.8%
3 1,677.875 4.24% 13.3%
4 1,493.128 3.77% 25.4%
5 1,467.162 3.71% 26.0%
6 1,260.125 3.19% 6.9%
7 1,234.680 3.12% 5.2%
8 1,212.836 3.07% 1.7%
9 1,190.811 3.01% 3.3%
10 1,144.904 2.89% 12.4%
11 1,079.758 2.73% 16.8%
12 985.759 2.49% 5.2%
13 913.829 2.31% 9.8%
14 798.152 2.02% 13.7%
15 590.846 1.49% 6.9%
16 583.589 1.48% 15.5%
17 519.201 1.31% 14.2%
18 440.176 1.11% 7.0%
19 402.551 1.02% 17.0%
20 375.097 0.95% 16.0%
Remaining Countries 8,826.162 22.31%
Rank Country GDP (billions of USD) Share of Global Incremental GDP Annualized GDP Growth
World 44,637.666 100.00% 8.7%
1 9,259.491 20.74% 30.0%
2 7,226.341 16.19% 6.1%
7,046.287 15.79% 5.4%
3 3,294.148 7.38% 18.7%
4 1,446.900 3.24% 3.3%
5 1,441.025 3.23% 10.3%
6 1,241.305 2.78% 4.5%
7 1,239.214 2.78% 7.7%
8 1,018.702 2.28% 5.5%
9 950.875 2.13% 10.5%
10 946.698 2.12% 5.0%
11 851.188 1.91% 7.0%
12 706.292 1.58% 6.7%
13 699.905 1.57% 6.8%
14 636.440 1.43% 8.7%
15 634.219 1.42% 10.1%
16 623.271 1.40% 3.4%
17 573.686 1.29% 10.7%
18 540.237 1.21% 10.4%
19 499.933 1.12% 8.0%
20 463.329 1.04% 10.2%
Remaining Countries 10,344.467 23.17%

See also

Notes

References

  • Aristotle, Politics, Book I-IIX, translated by Benjamin Jowett, Classics.mit.edu
  • Barnes, Peter, Capitalism 3.0, A Guide to Reclaiming the Commons, San Francisco 2006, Whatiseconomy.com
  • Dill, Alexander, Reclaiming the Hidden Assets, Towards a Global Freeware Index, Global Freeware Research Paper 01-07, 2007, Whatiseconomy.com
  • Fehr Ernst, Schmidt, Klaus M., The Economics Of Fairness, Reciprocity and Altruism - experimental Evidence and new Theories, 2005, Discussion PAPER 2005-20, Munich Economics, Whatiseconomy.com
  • Marx, Karl, Engels, Friedrich, 1848, The Communist Manifesto, Marxists.org
  • Stiglitz, Joseph E., Global public goods and global finance: does global governance ensure that the global public interest is served? In: Advancing Public Goods, Jean-Philippe Touffut, (ed.), Paris 2006, pp. 149/164, GSB.columbia.edu
  • Where is the Wealth of Nations? Measuring Capital for the 21st Century. Wealth of Nations Report 2006, Ian Johnson and Francois Bourguignon, World Bank, Washington 2006, Whatiseconomy.com

Further reading

  • Friedman, Milton, Capitalism and Freedom, 1962.
  • Galbraith, John Kenneth, The Affluent Society, 1958.
  • Keynes, John Maynard, The General Theory of Employment, Interest and Money, 1936.
  • Smith, Adam, An Inquiry into the Nature and Causes of the Wealth of Nations, 1776.

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