What is an Economy?

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An economy is a large inter related system of production and consumption activities that help in determining the allocation of scarce resources. This is also known as an economic system.




Economy is a Greek word which means household management. The meaning of the term economy has evolved a lot over time. An economy is a system which provides people with the means to work and earn a living. It is a system that provides a means of living to the people. In this task, it makes use of the available resources to produce goods and services that people want. At the same time it gives the people an opportunity to make money to buy those goods and services that are being produced. For example, Indian economy consists of all sources of production in agriculture, industry, transport, communication, banking etc.

Today the term refers to the system of activities related to production and consumption which are carried on in daily life. For instance, we have seen mines, factories, shops offices flyovers etc. all operating in our day to day life. All of these institutions and organizations may be collectively called an economy. Such units allow people to earn an income and, at the same time, contribute in the production of goods and services which people require for use.




Vital processes of an Economy

The economy is a system which provides living to the people. For this aim to be fulfilled, it is necessary that every economy should undertake three economic activities, which are –

  1. Production
  2. Consumption
  3. Investment or Capital Formation

These activities are known as the vital processes of an economy.

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