Economics: A Brief Introduction of Economic Systems and Sectors in Economy
Adam Smith is known as the father of Economics.
Definition of economics:
The term economics comes from the Greek term ‘Oikonomia’ which is composed of Oikos (house) and nomos (custom or law) meaning the rules of the household.
Economics studies the ‘economic activities’ of human beings.
Economics is a social science that studies economic activities to gain an understanding of the processes that govern the production, distribution, and consumption of goods and services in an economy.
However, it has not been as easy to define economics as it has presented, but we can take some definitions as reference:
“Economics is the study of how societies use scarce resources to produce valuable commodities and distribute them among different people”. (Samuelson, P.A., and Nordhaus, W. D. Economics, Tata McGraw Hill Company Ltd.)
“Economics studies how individuals, firms, governments, and other organizations within our society make choices and how these choices determine a society’s use of its resources.” (Stiglitz, J.E and Walsh, C.E. Economics, W.W. Norton & Company).
Branches of Economics:
Economics is divided into two broad branches called:
- Micro Economics
- Macro Economics
- Microeconomics is concerned with how supply and demand interact in individual markets for goods and services.
- It examines the economic behavior of individual actors at the level of the individual economic entity: The individual firm, the individual consumer, and the individual worker.
John Maynard Keynes is considered the father of macroeconomics as the branch came into focus after the publication of his seminal work, the General Theory of Employment, Interest, and Money in 1936.
- Macroeconomics is concerned with how the overall economy works. It studies such things as employment, gross domestic product, and inflation.
- It studies the economy as a whole and its features like national income, employment, poverty, the balance of payments, and inflation.
Comparing micro and macro-economic:
The micro theory evolved from the theories of how the prices are determined, on the other hand, the macro is rooted in empirical observations that existing theory could not explain.
While the micro takes a bottom-up approach to analyze the economy, the macro takes a top-down approach.
Econometrics: It is the third core area of economics other than micro and macroeconomics.
- Econometrics seeks to apply statistical and mathematical methods to economic analysis.
Some other Branches of Economics:
Developmental Economics: It is a branch of economics that deals with the economic aspects of the developmental process in low-income countries.
- The goal of development economics is to determine how poor countries can be transformed into prosperous ones.
Behavioral economics: the branch of economics that deals with the effect of social, cognitive, and emotional factors on the economic decisions of individuals and their consequences for market prices, return, and resource allocation.
- Behavioral economics mainly explores why people sometimes make irrational decisions and why and how their behavior does not follow the prediction of economic models.
International economics: The branch of economics which studies economic interaction among different countries, including trade, foreign exchange, the balance of payments, and balance of trade.
Environmental economics: In this branch of economics the impact of environmental policies on the economy is studied. The main goal of environmental economics is to balance economic activities and environmental impacts by considering all benefits and costs.
Information Economics: The impact of information technologies on the economy is studied in this branch.
Demographic economics or population economics: It is the application of economics to demography, the study of the human population, including the growth, size density, and distribution of the population.
What is the Economy?
We can define the economy as “economics in action”. Economies are divided into different types based on the extent of government involvement in economic decision-making.
There is a long list of economic systems, here we discuss the three major systems of the economy:
This is considered the first formal economic system emerging out of the traditional economic system.
The origin of the market economy is tracked back to the work (An Inquiry into the Nature and Cause of the Wealth of Nations, 1776) of the Scottish philosopher economist Adam Smith (1723-90). The ideas of Adam Smith were drivers of two economic systems i.e. “capitalism” and “free market economy” based on demand and supply.
Capitalism: It is focused on the creation of wealth and ownership of productive assets.
- In a capitalist system, there might be some government regulation but the private owner can have a monopoly on the market and thus prevents competition.
Free market economy: It is focused on the exchange of wealth.
- A free market economy is solely based on market forces, and there is little or no government regulation.
- That is why in a free market economy, free competition is possible without any intervention from outside forces.
The non-market economy was based on the (immediate) ideas of Karl Marx (1818-83), consisting of two variants – socialist and communist.
- In the socialist model (ex-USSR, 1917-89) state was having ownership control over only natural resources, whereas in the communist model (China, 1949-85) the state used to have ownership control over labor also.
- The communist model is also known as a state economy, Command economy, and Centrally planned economy.
A mixed type of economy consists of a combination of public sector and private sector units. Here the government is the decision-maker for the public sector and individuals, and businesses make decisions for the private sector.
- A mixed economy basically incorporates governmental involvement in a market-based economy.
- The first country to announce adopting this system was France (1944-45) with the announcement to adopt national planning.
Sectors of Economics:
In a country, economic activities are broadly divided into three main sectors:
- Primary sector
- Secondary sector
- Tertiary sector
The primary Sector is involved in the extraction or harvesting of products from the earth. So in this sector, economic activities based on natural resources are involved such as mining, agriculture, oil exploration, etc.
- Agrarian economy: When the agriculture sector contributes a minimum of half of the national income and livelihood in a country it is called an agrarian economy.
- The packaging and processing of raw materials are also considered a part of the primary sector.
- As an economy develops the share of the primary sector in total production and employment goes down.
The secondary sector is involved in the production of finishing goods, as it contains all economic activities under which raw materials extracted from the primary sector are processed.
- Manufacturing is one of the sub-sectors of the secondary sector and has proved to be the largest employer across the Western developed economies.
- Industrial economy: When the secondary sector brings in a minimum of half of the national income and employment in a country it is called an industrial economy.
The tertiary sector is also called the service sector. All the economic activities where services are produced fall in the tertiary sector, such as education, healthcare, banking, communication, etc.
- In advanced developed economies, the tertiary sector is the largest in terms of production and employment.
- Service economy: When this sector contributes minimum half of the national income and livelihood in a country it is called a service economy.
The subsectors of the tertiary sector created by experts:
- Quaternary sector
- Quinary sector
Quaternary sector: The sector consists of intellectual and knowledge-based activities, also known as the ‘Knowledge Sector’. In this sector, activities related to education, research, development, etc are involved.
The quaternary sector plays the most important role in defining the quality of the human resources an economy has.
Quinary sector: This sector consists of the highest levels of decision-making in a country. This includes the top officials of the government, media, universities, etc.
The number of people involved in this sector is very low rather they are considered the ‘brain’ behind the socioeconomic performance of an economy.
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