Understanding the Economy - How It Works & What You Should Know

Understanding the Economy - How It Works & What You Should Know
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Point Editorial

Economics refers to the process in which we create, buy, and sell goods and services through the exchange of currency.

A concept derived from the works of Greek thinkers, the notion of an economy is continuously evolving. 

Read on to learn more about what an economy encompasses, the history of economies, the different types of economies, and how they impact a country. 

What is an economy?

The definition of economy derives from the Greek "oikonomia," meaning "management of a household." An economy is a system defined by interaction, consumption, and exchange. It’s crucial to remember that an economy isn’t a self-contained entity. Other realms, including culture, the law, geographic regions, and social structure influence and impact the economy.

A country’s economy is a foundation for producing goods and services, encouraging innovation, and extracting resources. It’s also a platform through which consumers can buy, sell, and trade materials from businesses and companies. 

Individuals and groups like families, professional and private organizations, and the government all participate in the economy. 

The theories of ancient philosophers like Aristotle and Socrates helped to construct most modern — especially European — economies. 

Then, in 1776, Scottish academic Adam Smith penned The Wealth of Nations, sharing his beliefs that contemporary systems evolved from pre-historic bartering into a structure that is heavily based on money and that would — in the decades to follow — be based on credit. 

It wasn’t until the 20th and 21st centuries (notably after the Great Depression and the Second World War) that the concept of globalization and interconnectedness bloomed into what it is today. Now, companies and consumers alike have access to products, employment, and information at an international level. This allows some companies more significant opportunity or influence, which can affect free markets across borders. 

The study of the economy is called economics; economists can specialize in microeconomics or macroeconomics. The former focuses on the behavior of individuals, how they make decisions, and how they interact with each other in the economy. The latter focuses on large-scale issues like inflation, gross domestic product (GDP), and unemployment trends. 

How does the economy work?

In its most archaic form, an economy functions according to the law of supply and demand. A real economy is an incredibly dynamic entity, constantly shifting and responding to various trends. 

An economy’s hierarchy has three basic levels:

The local economy

A “local economy” is the network of goods and services that are part of a specific community. These systems operate on a small scale compared to national economies. Many resources and businesses were localized and easily accessible until the 19th century. Now, though still vital, local businesses play less of a role in our highly globalized economy. 

The national economy

A national economy encompasses all the local and regional or state economies within a country and integrates them. This level of the economy and its operation is most affected by historical events, political preferences, and laws — all of which are affected by the country’s development. A country’s territory, population size, social hierarchy, climate, natural resources, and modes of production are all interconnected facets of such a system. 

The global economy

Also known as the world economy, the global economy refers to the entire population of the planet and its activities. Nations interact with one another through exporting and importing goods, travel, and other financial exchanges like trading and investing. Each country contributes something different to the global economy and is affected by its operations. 

Types of economies

Excluding the global economy, most economies fit into the spectrum below, regardless of their size. This helps classify and illustrate a country's relative wealth and ideological views. Economies on the right of the spectrum tend to value freedom and the individual, while the left is more collectively-minded in market regulation. 

Command markets

In a command market, the government fully regulates economic production, including production and creation, as well as who can purchase these items.

Free markets

In free markets, the consumer and their preferences wholly determine product demand, and business producers choose how to meet them. 

Mixed markets

Unlike the other two types, a mixed market economy falls in the middle of the economic spectrum. It combines a command market and a free market with certain boundaries. Consumers, producers, and the government all have a role in product demand and mass production methods. 

 Economic systems

Described below are the main types of economic systems that local and national economies can follow. 

Feudalism

Feudalism was extremely prevalent during the Middle Ages. In this system, a king owned the lands. Nobles would be given sections of that land and hired ordinary citizens to farm it and produce sellable products. Citizens would pay a tax in exchange for using such products. 

Capitalism

A large majority of nations adhere to a capitalist economy. The most famous capitalist society is the United States. This system’s privatization and establishment of boundaries away from the reach of the government are unique. The system’s focus is generating profit. 

Socialism

In a socialist economy, the public owns everything. Collectivism is prioritized over of individualism. Goods and materials are produced based on the needs of a society, making it less consumer-driven.

Communism

Communism is similar to socialism, so it's easy to get the two confused. In this system, everyone contributes how they can. The overall goal of communism is to create a classless society where everyone owns a portion of everything, based on the ideas and writings of the German philosopher Karl Marx. 

Why is an economy important?

You may be asking yourself, so what? Why does any of this concern me? Living costs, employment rates, interest fees, government spending, and your overall quality of life are all affected by economic booms and busts. The economy is constantly changing alongside the population. People's values, discoveries, and any available resources — both artificial and natural — shift in response to economic conflicts and the pursuit of power and wealth.

The economy can help create change, as well as help a country grow.

Point's contributions

The economy demands a lot of knowledge and authority to navigate, but participating in the economy doesn’t have to be intimidating. By shopping for groceries or going on vacation, you're establishing your presence within the community and participating in the economy. 

And when you spend with the correct banking card, your economic activity is much smoother. Allow us to introduce Point Card.  

You work hard for your money, and Point works just as hard for you in return.

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Alongside Point’s extensive rewards program designed to promote personal economic activity by growing your wealth, Point Card comes with built-in features to help protect and save your money. These measures include rental car and phone insurance, new purchase insurance, two free ATM withdrawals every month, fraud protection with zero liability, and no interest rates.

Point is an excellent tool for intelligently navigating your financial journey, regardless of the economy you participate in.

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