The Nature of Economy

An economy is a physical location, the production, processing and distribution of goods, services and products by various economic agents. In simple terms, it is said ‘a society that fully satisfies the needs and activities of the producers and consumers based on the productive potential of its economy’. The production of a product is based on the inputs (or human capital), which refers to the input of human capital – workers, capital goods, raw materials, etc. Capital goods include the means of production such as machinery, buildings, and land.

Inputs are produced and processes vary according to the level of employment, technology, geographical location and rates of technology change. Outputs are produced, processed and traded. Economic growth is measured by the output level of each industry within an economy. Input-output balance describes the state of economies and their ability to expand or contract. The concept of input-output balance is used to examine the relationship between economic growth and unemployment rates of an economy.

To ascertain the overall performance of a country’s economy, several macroeconomic indicators are used. A popular tool is the Purchasing Managers Index (PMI). This index indicates the extent to which households spend on investment goods like infrastructure and housing, which are necessary for generating economic growth. The Purchasing Managers Index also indicates the extent to which households are capable of investing in liquid financial assets such as stocks and bonds, which are important components of long-term wealth creation. Other important indicators of the economy are output gap, inflation, current account deficit, international trade and budget deficits. These are some of the most important economic concepts, which are widely used by all governmental organizations and businesses in order to understand the state of their respective economies.