What is economy? We hear this word almost on a daily basis. Sometimes like Indian Economy or world economy. And more commonly associated with the word, “crisis”. In every household, at one point or another, there has been a time where someone has been fired or ‘let go’ due to the financial crisis.
Every day people curse the economic state of the country. And why shouldn’t they, all they see in front of them is unemployment, inflation, spiking interest rates, and dropping rupee value. They are right. These are some of the signs of a bad economy, but not necessarily. There are countless other consequences for a downhill economy and I will mention them later on.
But first things first, what is economy?
Of course, we can google this term to find the official, compact but complex definition of the word, but that would defeat the purpose of this article, which is to give you the most basic, simple and correct understanding of the concept of economy.
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First, lets go over the the definition,
“An economy (From Greek οίκος – “household” and νέμoμαι – “manage”) is an area of the production, distribution, or trade, and consumption of goods and services by different agents in a given geographical location. … In other words, the economic domain is a social domain of human practices and transactions.”
In simple words, an economy is an area where people trade. This trade can be of different kinds. It might involve the exchange of one goods for the other or like in modern times, a predefined currency changes hands.
I’ll try to make it clearer with a small example. Imagine a small village. Every village has houses where people live. These people need food to survive and to do get food, they either need to farm or hunt. As we can all understand, not everyone has the skill or wish to be one of these. Therefore, only a few select people who actually have the heart and dedication to fulfill these tasks. The question now arises that what should the rest of people do? Should they just sit around all day and wait for the hunters to put food on their table? Well, it been a long time since humans lived in caves and waited around all day. Even in those times, they found some way or other to help out.
These days, there are a number of things they can do. Our needs have widened and have grown at an exponential rate. We crave things more than just to survive. The concept of life has now been modified to mean not to survive, but to ‘live’ and enjoy. We make houses, we decorate houses, we wear clothes, we transport, we dance, we run , we play and countless other things. This is where the rest of the ‘non hunters and non-farmers’ come into play.
According to their skills, they choose different fields of work, some choose to be potters, some are builders and some are entertainers. All this requires effort too, just like hunting and hence the first concept of exchange was developed.
“you give me food, I’ll build you a pot” can be one simple example.
In the older days, people used to trade in goods and services. There was no currency. But as the need to equate two different goods arose, a standard currency was introduced, to make things simpler and fair. After all, an oxe is certainly far more valuable than a small clay pot, right? With the introduction of the currency, things started to speed up. People had now started a mad race to acquire as much of it as possible. The merchants were now working as hard as they could, making use of various techniques to enhance the quality of their goods and services to beat other competitors.
Now think for a second. So many people, all trying to get rich. In such a race, what’s the one thing that is being consumed??
Food, water, wood, stone, metal are all resources. When people who have currency want meat, metal, animal skin, they create a demand, which leads to an increase in the number of people who try to get them those things in order to get richer themselves. Now, these resources are not unlimited. If we talk about a small village, then it has limited amount of animals in the nearby forest, limited amount of metal and so on. The obvious result is a shortage of resources, which again, increase the value of the resources already in the market, causing inflation.
To conclude, the above mentioned concept of trade, production, distribution of limited resources is what an economy is. Comparing this village to a country shouldn’t be too hard now. The decisions made about how well to utilize these resources to an effective way are the key factors when we talk about economic growth, about which we will learn in subsequent articles.