An economy is a system of making and trading things of value. It is usually divided into goods (physical things) and services (things done by people). It assumes there is medium of exchange, which in the modern world is a system of finance. This makes trade possible. The alternative – systems of barter – exists only on a very small scale.
To better understand how the economy works, it can be discussed in three sections. These are:
- The primary sector which covers raw products from farming, fishing, and mining, and so on.
- The secondary sector which covers manufacturing of goods.
- The tertiary sector which covers a range of services, provided to people and companies.
The term 'real economy' is sometimes used to mean the part of the economy concerned with goods and services. This is contrasted with the 'paper economy', the financial side of the economy, which buys and sells on the financial markets.
Economic phases of precedence
The economy may be considered as having developed through the following Phases or Degrees of Precedence.
- The ancient economy was mainly based on subsistence farming.
- The industrial revolution phase lessened the role of subsistence farming, converting it to more extensive and mono-cultural forms of agriculture in the last three centuries. The economic growth took place mostly in mining, construction and manufacturing industries. Commerce became more significant due to the need for improved exchange and distribution of produce throughout the community.
- In the economies of modern consumer societies phase there is a growing part played by services, finance, and technology—the knowledge economy.
In modern economies, these phase precedences are somewhat differently expressed by the three-sector theory.
- Primary stage/degree of the economy: Involves the extraction and production of raw materials, such as corn, coal, wood and iron. (A coal miner and a fisherman would be workers in the primary degree.)
- Secondary stage/degree of the economy: Involves the transformation of raw or intermediate materials into goods e.g. manufacturing steel into cars, or textiles into clothing. (A builder and a dressmaker would be workers in the secondary degree.) At this stage the associated industrial economy is also sub-divided into several economic sectors (also called industries). Their separate evolution during the Industrial Revolution phase is dealt with elsewhere.
- Tertiary stage/degree of the economy: Involves the provision of services to consumers and businesses, such as baby-sitting, cinema and banking. (A shopkeeper and an accountant would be workers in the tertiary degree.)
- Quaternary stage/degree of the economy: Involves the research and development needed to produce products from natural resources and their subsequent by-products. (A logging company might research ways to use partially burnt wood to be processed so that the undamaged portions of it can be made into pulp for paper.) Note that education is sometimes included in this sector.
Other sectors of the developed community include :
- the Public Sector or state sector (which usually includes: parliament, law-courts and government centers, various emergency services, public health, shelters for impoverished and threatened people, transport facilities, air/sea ports, post-natal care, hospitals, schools, libraries, museums, preserved historical buildings, parks/gardens, nature-reserves, some universities, national sports grounds/stadiums, national arts/concert-halls or theaters and centers for various religions).
- the Private Sector or privately run businesses.
- the Social sector or Voluntary sector.
There are a number of ways to measure economic activity of a nation. These methods of measuring economic activity include:
- Consumer spending
- Exchange rate
- Gross domestic product
- GDP per capita
- Stock Market
- Interest rate
- Government debt
- Rate of Inflation
- Balance of Trade
Economy Facts for Kids. Kiddle Encyclopedia.