The Economy – What is it? Where is it? And why is it so important?

Without an economy, there isn’t much of a need to study economics. It is therefore central to everything we read and learn, yet can you really say with confidence what an economy actually is? First, we need to go back to the basic economic problem: that the world has finite resources but humans have infinite wants. The economy is part of the solution, a man-made system which attempts to provide an answer to the problem by deciding how we allocate resources.

The Economy is like an invisible force of nature. It has the power to make decisions for us and decide the way we live, the way we work, and the way we even make our own choices. The Economy is like a set of rules, rules which humans blindly follow as they don’t know any different. One thing is true though: that these rules are different depending on where you live in the world, and which economy you are part of. Let’s take a look at three places and see how they are different: North Korea, Singapore, and the United Kingdom.

Whilst we don’t know for sure because the country is so closed, we can assume that in North Korea, the government controls everything. And I mean EVERYTHING. First, they plan how resources are made and how they are extracted. They then take care of how resources are used to produce other goods and services. Next comes the distribution of resources, and yes you guessed it, the government controls that too. This means the government decides where resources go and who can use them. This is what we call a command or planned economy.

In Singapore, almost the complete opposite happens. Resources are not just allocated by the government, but mostly by individuals and the private sector – this refers to businesses owned by private citizens. Ordinary people have the freedom to make decisions on what is produced, how it is produced, and for whom it is produced for. The driving force behind this kind of economy is not the will of the government, but the will of the market. Everything comes down to supply and demand. We call this a free market economy.

So where does a country like the United Kingdom fit into this seemingly two-dimensional puzzle. Well, there is a third dimension, and it’s called a mixed economy. That’s right, it’s a mixture of both! In a mixed economy, private businesses and individuals play an important role in the allocation of resources and have a lot of economic freedom. However, the government is there to create rules and regulations which might protect the interests of consumers, or make sure that the system is efficient. In some cases, the government will be the main provider of a resource such as healthcare, security, or transport.