Economic System How an economy works

What is an economic system

An economic system is an organized way in which a state or a country distributes it's resources and trade goods and services across the whole nation or state.

The economy system consists of several institutions, agencies, decision-making process, entrepreneurs and many more.

Major players of the economic system

Most important players or agents in an economic system of a country are

1. Government


2. Consumer


3. Producers



Government: A organization made up of a group of people that governs a community or units, who are typically elected by the people of that community.

Consumers: Consumers are generally households and citizens of a country who purchases goods and services.

Producers: A economic agent who produces goods and services to sell to consumers.

The 4th player of an economy is the financial system, the 5th player of the economic system are central banks, central banks play a very key role in an economy. Money is very important instruments in an economic system, in modern economics money is very important instrument central banks in every country are an autonomous institution who are mandated by the government to control the amount of that is flowing in the economic system. so, basically central banks control the money supply 

These are the five key players of an economic system

The relationship between these players

Now, where these producer group of people found labor for producing goods and services, of course, they found labor from the consumer group, so the citizens provide labors to business and firms and in return they earn a certain income from this group of people,now business and firms producing something which they are selling to the government and households that means they make certain profits and the households and citizens they also earn income for the services that they provide. So, the government they charge tax to these two economic players to earn money, Taxes are the main source of revenue for the governments, business pay tax as corporates or service tax and household provided tax as income tax to the government, so this how the producers and the consumers are linked to the government.

Now in any economy or in any country, citizens of that country elect government and give responsibility to that particular group of people to run the country now running the country definitely need money and the government raise that money by taxing the businesses and the people, with that money the government provides many services and social welfare, as well as they,  improve the infrastructure of the country.


The last element in any economic system is the relationship or business relationship with the rest of the world, Import or export of a country affects its economy.



Other factors in which the economy of a country depends

1. GDP (Gross Domestic Products): It is a measurement of goods and services produced by any particular country.

2. Inflation: Inflation means prices of goods and services. If the money supply in any economy grows then the price of goods and services also increases. 

3. Deficits: Deficits means some kind of shortage, there are two kinds of shortage, One is the shortage of money by the government that is called physical deficits and shortage of import and export that is called trade deficits.

4. Policies and demographics: The rules or the guidelines or the decisions that government take in running the country and decisions of the central banks take to control the money supply in the country which affects the economy also.

Demographics is the most important part of a country by looking at the demographics we can make certain assumption what is the entire economy is going to do in future, for example, India is a very young country that means the average age of Indians is very low. This is extremely beneficial in the long run because he has lots of young people to provides labor and with lots of labor we will most likely produce lots of goods and services and as well as lots of consumers so, this in a way beneficial to India.

This how an entire economic system works.



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