An economy is a system of production, trade, and consumption activities that determines the allocation of limited resources in an entity. People, businesses, and governments interact with each other to produce goods and services and distribute them amongst themselves. There are many aspects of an economy, including money, unemployment, inflation, trade, business cycles, prices and monopolies, and more. Economics is the discipline that studies all of these issues.
All economies are different, and each is formed according to its culture, laws, history, geography, and other factors. Some are market-based while others are command-based. Most are a combination of both, and they can be private or public, capitalist or socialist. There are also mixed economies where elements of capitalism and socialism are combined.
The basics of an economy start with a country’s resources, such as land, oil, and labor. Next comes the inputs that go into making goods and services, such as raw materials and energy. Labor includes everything from the waiters at your favorite restaurants to the engineers who design cars and trucks. Finally, there are the outputs that come out of the economy, such as the wages paid to employees and the operating surplus of companies (roughly sales less costs).
Governments often play a large role in an economy. They influence it through monetary and fiscal policies. For example, the government might lower interest rates to encourage borrowing and economic growth or increase taxes to reduce inflation. The overall aim of these policies is to reach an economy’s goal, which may be anything from GDP growth to reducing income inequality.