How Does the Economy Work?

The economy is the entire system of people, businesses and governments exchanging products and services in exchange for money. This exchange is essentially what keeps our global economic machine running. However, this complex system is prone to fluctuations that can have serious consequences. These problems are often a result of financial markets going haywire. But the way that they work is far more complicated than a few men in suits on Wall Street making big decisions. In order to understand how the economy works, it is important to distinguish between the real economy and the financial one.

The distinction between the two is that the real economy involves the direct exchange of labor in return for a tangible product to consume or own. The financial economy is a layer on top of that which involves more complex activities such as investing in stocks, bonds and mutual funds. Investing in these more esoteric activities allows people, organizations and even governments to borrow and loan money and take on risk in order to make more money. This is a key element in the development of small and medium sized enterprises which are typically more labor intensive and create more jobs than larger firms.

Economic Analysis

Many careers focus on analyzing the relationship between a company and its environment in order to increase profits, reduce costs or find new ways of doing business. Some common fields of study include industrial organization, labor economics, resource and environmental economics, public finance, and macroeconomics. An economist analyzes supply and demand equilibrium, price and wage changes, the impact of government policies and other factors influencing an industry. A graduate degree in economics is the minimum qualification for most career paths in this field.

Economic Policy

The main function of economic policy is to influence the overall direction of a country’s economy. While this is not always an easy task, a well-formed economic policy can lead to long-term prosperity for all citizens. In the short term, economic policy can also be used to prevent large-scale recessions by cutting interest rates and encouraging consumption. Other tools that may be employed by economists include monetary policy, fiscal policy, trade policy and econometric analysis. An economist is often required to possess strong analytical and communication skills.