With difficult concepts and even more difficult terms, economy is hard to understand. However, here we will give you a basic grasp on the working of an economic machine
If you are someone with a curious mind that likes to go deep into concepts, then questions about ‘the economy’ might have popped up in your head. With many difficult concepts and terms, the working of an economy surely is difficult to understand.
The economy basically works like a machine or a system that comprises many different parts. Studying the working of economy in these individual parts makes it easier for anyone to understand.
Economy and the Economic system
People since prehistoric times, have been indulged in trading of valuable goods and services. With the invention of currency, barter ended and people started to receive money as a reward for the value they provide. Now with people receiving money for the value they provide, they do things that brings them the highest monetary reward. The people then use the money they have, for buying other things of value. This collection of productive activities is called an economy.
The Economy is further divided into national and global economy. Global economy is the economy of the world as a whole, on the other hand a national economy is restricted within a regional boundary. Unlike global economy, a national economy is controlled and steered by policies, systems and institutions.
The working of an Economy
An economy at the most basic level is a transaction, an exchange of value between two individuals. It is a collection of these transactions that make up the economy. Each transaction involves, an exchange of something valuable with money or credit (borrowed money). The total amount of money spent is what drives the economy forward since the money spent by one person is another persons income.
To control and maintain this large cycle of transactions, we use a Central Government and a Central Bank. Central Government collects taxes and spends money whereas the Central Bank controls the amount of money and credit in the economy.
Central Government’s role in the Economy
Over the course of history many governments have tried to exercise complete control over the economy whereas others have decided to stay out of it. However governments nowadays, usually lie somewhere in the middle of these extremes. With the central being a separate entity in most countries, the central government uses taxes and spending programs to control the total amount of money in an economy.
Thus when central government wants for people to spend more, it lowers the taxes and encourages people to spend. On the other hand, when it wants for people to limit their spending, it raises the taxes and discourages excess spending.
Central Bank’s role in the Economy
Having complete control over printing of currency and interest rates, Central Bank have the most power to influence an economy. Central bank aims to ensure stability and growth in the economy and it does so by using interest rates as their tool.
Central bank, when there is an excess amount of money in the economy increases the interest rates thus reducing loans and in turn, the spending. On the other hand when the amount of money in an economy decreases, central bank reduces the interest rates to promote loans and spending.
What is the growth of an Economy
An economy grows, when it produces more economic goods and services than it did in the past. In order to do this, individuals workers have to be more productive. This means that individuals would have to efficiently create more output from the same resources. An example of this is a farmer yielding more crops per acre than he did last year.
Thus a growing economy produces efficiently and has a surplus of goods. This surplus of good and healthy economic growth elevates the life of people in a country.