Some Terms used in Economics
What is Economics?
This is the first blog by Bhamini.
One of the most popular definitions of Economics states that Economics is the system of production, distribution and consumption of goods and services in a society.
While reading topics on economics, a lot of us are not clear about certain elementary terms.
We try to bring a few such terms and concepts through this blog.
- Simple & Complex Economy
Simple Economy is an economy where simple goods are produced using
simple techniques. It refers to a self-sufficient economy.
E.g. A family owns a piece of land and they cultivate it to eventually consume the produce on their own.
Complex Economy refers to an economy where goods are produced in large quantities and production is mechanised. It refers to growth and economic progress.
E.g. Henry Ford started the first assembly line production of passenger cars in a factory which used labour, machinery, raw material and the eventual product was made for customers across America.
2) Closed & Open Economy
Closed economy refers to a place where we do not trade with other countries. Price fluctuations in international market do not affect us. E.g. USSR. In the present times, there is virtually no country that has a closed economy. However, North Korea is largely closed with close to 90% of the imports coming from China.
Open Economy refers to an economy that has trade relations with other countries and price fluctuations in international market affect the country. Almost all countries in the world have open economies these days.
3) Unplanned & Planned Economy
Unplanned economy is where prices are affected directly by market forces of demand and supply. There is no government interference.
Planned Economy is where government has full control over prices of goods. E.g. Economy of USSR before 1991.
Classification on the basis of Production:
Capitalist Economy: It is the economy where sources of production are owned by private individuals. There is no government interference and main motive is making profits. E.g. countries like United States, Canada and Germany.
Socialist Economy: It is the economy where there is state ownership and there are specific institutions for production & supply.
E.g. In USSR, the government owned all the land. No individual/private entity could own land in their name and the government could ask anyone at any point to vacate.
Mixed Economy: It refers to an economy where market is determined both by individuals and government. It consists of both private and public sectors.
Virtually every country is a mixed economy. India is an example.
Classification on the Basis of Development:
It is the type of economy where a country is well developed. The standard of living of the society at large is high, with low income disparity. Such countries use latest technology and are at optimum utilisation of resources.
E.g. In United States, it would be quite normal for a waiter at a restaurant to be dining at another 5-star restaurant as a customer.
It is the type of economy where there is low national income and the resources are not fully utilised. Our country is a good example of a developing economy with the problems of population growth, corruption and low literacy rates.
Please also read other blogs on Economics on this website to understand the subject explained in simple words.