The economy is the network of trade that determines the allocation of scarce resources and their value. It can be local, regional, national or global in scope and is influenced by the culture, history, political structure and laws of a place. People generally classify economies based on the amount of government control that is involved. At one end of the spectrum is a market economy with no government interference and at the other is a command economy where the government directs production and distribution. Many countries fall somewhere in between these extremes and operate mixed economies.
Economics is the study of how people and nations develop a survival plan based on shared labor and resources. The term is derived from the Greek word for household management, or “oikonomia.” People have been trading goods and services to sustain themselves long before recorded history began. The modern concept of an economy was codified by philosopher Adam Smith in his 1776 book, The Wealth of Nations.
Businesses, households and governments all contribute to a nation’s economy in different ways. Economic growth occurs when businesses retain their capital and reinvest it in new products or expanding existing ones. This results in higher productivity, more jobs and greater wealth. Governments can impact an economy through monetary and fiscal policies. Monetary policies involve central banks regulating interest rates to manage inflation. Fiscal policies involve government spending money they’ve collected through taxes to achieve economic goals such as GDP growth or reducing income inequality.
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