Thursday, 7 May 2015

What is Economy? Understanding its relevance in Economics & Types of Economy

What is Economy?
Economy is a system or organisation, wherein, economic activities take place. It is a man-made system for facilitating the satisfaction of the various wants and needs of human beings that can be achieved through generation of income and production and consumption of goods and services.

How does Economy come into existence?
Economy is created by man to facilitate his existence in the society. Man needs to satisfy his wants in some way or another to maintain his existence and for this he needs a system of economy to get a living.

In primitive world, there was no system of economy and man used to satisfy his wants randomly on his own. He plucked fruits or dug edible roots from earth and  hunted birds & animals to satisfy his hunger. He used to live at water resources to satisfy his thirst. He covered himself with leaves to protect from heat, cold and rain.. He never thought of the need for economic institution nor did he possess such kind of knowledge.

But, gradually, he learnt about exchanging his goods with items available from others (known as barter system) and then invented coins and currency, production, distribution and consumption  to satisfy his ever growing needs. Slowly, he started learning about saving or economising the goods and resources as population started increasing and natural resources appeared to be not enough in satisfying his needs. He invented other means like improved farming, manufacturing, marketing, professional services etc. to earn income and exchange things with others and thus modern economy and economic systems came into existence.

Some notable features of an Economy
  • Economy or economic system is manmade to get his living.
  • Economy is always susceptible to changes.
  • Economy differs according to geographical, cultural and available natural resources.
  • Demand, Production, Consumption, Saving and Investment are the important activities of an economy. 
  • The producer and consumer can be the same person in an economy as whatever produces, he consumes also.

Purpose of Economy
The purpose of any economy is to satisfy human wants though interaction among people. It is a process of bringing the services and goods within the reach of consumers through different activities of production, supply and consumption with the help of available resources and factors of production. The involvement in these various activities generates income to those factors. But, any economy is bestowed with limited resources only for performing these activities. The available resources are either scarce or not known to us. May be they are not fully discovered and utilised. So, those economies which utilise the resources to their utmost use become more developed than others who are unable to use them more perfectly. Thus, we see variations in economies.

Three Types of Economy
Broadly, there are three types of economy known as Capitalism, Socialism and Mixed Economy. Let us look at the salient features of these economies.

Capitalist Economy
  • Under capitalist economy, the producers are free to take their decisions without any interference from government mechanisms.
  • They own the properties and resources acquired by them. There are no restrictions as to ownerships and boundaries.
  • Profit earning is the main force driving the capitalist economy. Producers are interested in increasing their profits and consumers are interested in availing utmost satisfaction.
  • But, capitalist economy has the drawback of monopolising the markets.

Socialist Economy
  • Under socialist economic conditions, the common cause of society is considered as more important factor.
  • The government interferes in all matters and sets norms and guidelines for producers and businessmen.
  • All resources are owned by government in the interests of public and they are allotted to producers and manufacturers according to some procedures and laws established by the government in the interest of public.
  • Social welfare is the main goal in this kind of economy rather than profit motive.

Mixed Economy
  • This is a mixture of capitalism and socialist economy. The good features of both economies are combined together to form mixed economy.
  • In this mixed economy, both private and public participations are there.
  • More essential resources and factors of production along with activities of business are controlled by government in this type of economy by creating public enterprises and corporations.
  • Price mechanisms are controlled by government, fixing prices of essential commodities and controlling hoardings and black marketeering, etc.
  • Annual plans and long term plans are made by government to control all financial and economic activities.
  • This mixed economy is a good type of economy for the development of society, if properly employed by both government and businessmen honestly.

Economy and Economic Development
Economy of any place gets identified by its being developed or undeveloped or underdeveloped natures. So, economic development is the standard of measurement for identifying economies at any given time.

What is Economic Development?
Economic development refers to the all over growth of economy in general. It means that the people living in that economy are enjoying a good level of standard of living by being able to earn ample income which satisfies almost most of their wants. Some of the salient features of economic development include the following.

  • It is not simply limited to a mere growth of income and standard of living. 
  • Economic development implies that people are living a better life in every aspect of life. 
  • There is reduction of poverty and unemployment and diseases. 
  • The gap between rich and poor gets narrowed with more opportunities created for earning of income and acquisition of wealth made accessible to poor also.
  • There will be control over population growth and and hygienic conditions of environment.
  • The overall expenditures of public and governments will be within the limits of available income and resources of income.
  • A state of improvement in technology and trade relations has been achieved.

Three states of Economy based on their development
Based on economic development, economies can be classified into developed, under developed or developing economies. Let us have a look at the features of these economies.

Developed Economy
A country that has attained most economic growth and is enjoying comparatively good standard of living and better quality of life with higher per capita income, is known as a country with developed economy. Such countries have higher standard of education, better amenities, higher mortality rate, etc. Factors like GDP or Gross Domestic Product, Gross National Product, use of advanced infrastructure and level of industrialization are indicators for developed economy. Countries like USA, UK, Germany, Japan, Australia are some of the examples for developed economies.

Under-developed Economy
Countries with poor growth and poor standards of living are classified as under-developed economies. They are characterized by very low GDP, low per-capita income, poor standards of living, poor amenities and low mortality rate. But most of these countries have now moved to the class of developing countries.

Developing Economy
This group constitutes of all those countries that are still developing but have moved out of the Under-developed category of economy. These countries are characterized by continuously dwindling statistics of growth and standards of living, major disparities and wide gaps economically between different classes of people and regions. The resources do not get fully utilised or tapped in these economies. Countries like China, India, Pakistan, Sri Lanka, Brazil and Mexico are among a long list of developing countries.