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Basic Ideas about Economy| Defining Economy and Economics, Types of Economics, Development of different Perceptions of Economy, Different Types of Economy

Defining Economy and Economics

The word economy comes from the Greek word oikonomos, which means “one who manages a household.” The definition of economics is different from different perspective. In lame language, It is the study which deals with the activities related to production of goods and managing their distribution.
In most societies, resources are allocated not by an all-powerful authority, based on dictatorship or aristocracy but through the combined actions of millions of households and firms. Economists study and try to obtain a pattern how people make decisions: how much they work, what they buy, how much they save, and how they invest their savings.
Economy is the related to study of production and consumption of an particular area, country.

Challenges Related with Economics

The main challenges are related with fulfillment of demand of population. The basic demands are of food, shelter and cloths. These demands for more developed society may include AC, refrigerator, geyser, smart phones. The challenge includes regular, continuous demands of these goods.

Types of Economics

The field of economics is traditionally divided into two broad subfields. They are Microeconomics and Macroeconomics.


• It is the study of how households and firms make decisions and how they interact in specific markets. Macroeconomics is the study of broad prospective of Economics.

• It is study of phenomena including inflation, unemployment, and economic growth.


• In Macro-Economics, economy as whole is studied. The big picture of economics is studied.

• The features like National Income, Gross domestic Product like unemployment, poverty, inflation etc. which are defined for a particular economy are discussed.

Development of Different Types of Economy

Development of Capitalist Economy/Market Economy

Adam Smith (1723–1790), a Scottish Professor in his famous book ‘wealth of Nation’ admired Capitalist economy. His writings gave idea of classical Economics. He was against government regulation in Economy. He supported idea of free market. He purposed ideas of ‘division of labour’ and an environment of ‘laissez faire’ (non-interference by the government) . USA after Independence adopted these ideas for its Economy. These Ideas gave birth to capitalist economy.

Development of Socialist economy/Non-Market Economy

German philosopher Karl Marx (1818–1883) gave idea of Socialist economy. The idea was adopted by Russsia after Russian Revolution in 1917. More ideal approach of Karl Mark was adopted by People’s Republic of China in 1949. The Russia was having Socialist Economy while China was having communist economy.
Socialistic economy has collective ownership of the means of production. It included property and assets. It give large role to state in controlling economy. In communist economy, there is state ownership of all properties as well as labour . State have absolute power to state in running the economy.

Difference in Ideologies of Market and Non-Market Economy

Market economy considered that economy should be run by capitalists and industrialists. There should be no regulation and restriction by the state (or government) on economy. Socialist economy considered major role of state (absolute role in communist economy) in running the state.

Occurrence and development of Mixed Economy

The Great Depression of 1929 started with crash of stock Market in US. English Economist John Maynard Keynes theory helped in revival from this great depression. He suggested Government should play important role in economy, unlike no government interference in capitalist economy. He called for increase in government expenditures, fiscal deficient, lower interest rates. Keynes advice was followed by many economies. Government started producing some basic needed goods. These were related to healthcare, education, food etc. Such goods were came to known as public goods or the social sector. Thus, capitalist economies adopted some good points from the state economy and formed a mixed economy.

Keynes suggested capitalist economy, to adopt some good things of state economy. Oscar Lounge was the polish philosopher. He suggested, state economies to adopt some good things from capitalist economy. He suggested idea of market socialism. But, the socialists and communists were very much strict and stubborn about their policies.
Finally, China a communist country, adopted market Socialism in 1985. This conversion didn’t go well for Socialist Soviet Union, causing its break down.

A mixed economy model was adopted by many countries. India opted for mixed economy after getting Independence. The major opinion about such economies came when World Bank accepted that government plays a vital role in economy. The WB suggested that every country should determine the areas and the extent of the market and the state intervention, depending upon its own stage of economic development, socio-political and other historical factors.

Types of Economy

Capitalist Economy

(a) It is based on Idea of Adam Smith. He was against the idea of involvement of government in commerce and Industry.
(b) The Idea of capitalist economy focus on competition in market.
(c) It emphasis that control of economy should be in hands of industrialists and enterprises.
(d) USA followed this Idea.

State Economy

(a) It was based on the Idea of German philosopher Karl Marx.
(b) The state Economy is further divided in two types. The first one is Socialist. This kind economy emphasized collective ownership of the means of production. It suggests large role of state in running the economy of a state. This was followed by Soviet Union after Russian Revolution. This is totally opposite concept of capitalist economy. Another type of state economy is communist economy. This was followed in China before 1985. It Suggests state ownership of all properties including labor with absolute power to state in running the economy.

Mixed Economy

(a) A mixed economy contains a part of it as state economy and another part as market economy.
(b) The nature of mixed economy depends upon socio-economic culture of the area.
(c) India is having mixed economy.
(d) India adopted policy of mixed economy after Independence. The nature of economy changed after 1991, where Globalization, Privatization and Liberalisation was promoted.

Sectors of an Economy

Sectors of an Economy

Depending upon the GDP share, the type of economy is defined. If more than 50% contribution of GPD is by primary sector, the economy is said to be agrarian economy. If this much of contribution (50 %) is by secondary sector, the economy is said to be industrial. The economy is said to be service economy, if it is done by service sector.
India, at time of Independence was Agrarian economy. Now, it is moving toward service economy.

The contribution of agriculture in Indian economy is 14% but more than 60% population is involved in agriculture.

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