The Importance of Economy and How does an Economy Works?

The knowledge of the economy is integral for running the affairs of the state or the world smoothly. The economy plays an important role in various functions of a country. The importance of the economy has increased tenfold with the emergence of globalization because of the interconnectedness of economies worldwide. The market has increased with the increase in demand and supply to meet consumers’ needs. The article highlights the role of the economy in different areas of our lives and the global system.

What is an Economy?

An economy is a collection of markets of different levels and natures that allow the sellers and buyers to gather to meet their subjective goals. No matter how these goals differ, the main purpose is to distribute scarce resources in a market. Although every economy has its own ways to operate, the end goal remains the same: to increase the production and sale of goods and services. Every economy is compromised of the following core functions:

• Businesses, either big or small that produce goods as per the consumer requirements or market’s demands.
• Consumers who spend money to buy the services and products/goods produced by businesses.
• The government whose role is to regulate the interaction between businesses and consumers by imposing taxes and hiring labor for an economy’s smooth function.

How does an Economy Works?

To understand the importance of the economy it is necessary to understand the working of an economy. First, it is important to note the basic activities occurring in an economy: the production of goods, consumption of these goods and services, and the transactions occurring between them. Production or supply of these goods by businesses depends on the demands of the said market’s consumers. In simple words, ‘the more the demand, the more is the supply.’ Moreover, consumers’ demand depends upon various factors like culture, the climate of the region, geography, history, special events of the region, and global trends. Therefore, it is said that every economy is different from the other economy.

Due to the widespread of media around the globe, trends change rapidly. As a result, there is a process of constant evolution expansion in a modern global economy.

1. Economy and Geography

The world consists of a variety of geographic features. This difference in geography reflects in every aspect of people’s lives. For instance, people living in plain areas, mountainous areas, coastal areas, deserts, and forests differ significantly. The living styles, culture, foods, defense methods, etc., mostly depend upon the geographic features. Similarly, economic activities also depend upon the geography of the region. Therefore, the importance of the economy is relative to the geographic feature.

2. Define Source of Income

A country’s main source of income is highly dependent on its geography. For example, coastal areas mainly depend on their fishing industry because of their high production of fish. Similarly, many desert areas like Saudi Arabia and Kuwait have many oil reservoirs, and their whole economy depends upon oil extraction and export. On the other hand, countries that have fertile soil mainly have agrarian economies. This means that economic activities such as production, demand, use of labor, allocating resources, and international trade depend mainly on the regional factor – that is, geography.

3. Forming Trade Allies

The geography of a state is also a determining factor for forming trade allies with one another. Neighboring countries always try to have a friendly relation because of the trade opportunities. Similarly, countries often use land or sea routes of other countries to carry out their trade. Therefore, it becomes important for countries to utilize their geographic features smartly to add to their benefits.

4. Why is Economy Important in National Defense?

The occurrence of various wars, conflicts between countries, and anarchy in international relations – as seen in history – shows that there are many threats to countries’ national security. Due to this, many countries allocate a huge sum of their GDP for national defense. This highlights the importance of the economy for national security. Countries are in a constant race of developing their arsenal and strengthening their forces to fight off the external threats. In addition to this, the development of advanced weapons is also necessary to show one’s power. Undeniably, building a national defense requires a lot of resources and finances. Therefore, the economically weak countries fail to construct a strong national defense system. More than often, these countries have to depend on others economically or strategically strong countries for their security, creating a mess of political economy ties within international relations. It also results in the loss of autonomy of states. For example, the USA is currently the world’s superpower mostly because of its leading economy that has helped the USA develop a strong military and national defense system.

In some cases, a country’s geography either becomes a natural defense for the country or a threat. Countries with secure geography can spend more of their GDP on other sectors for national growth. In contrast, countries surrounded by threats have to spend more on national security, ignoring other sectors. Consequently, the cycle continues.

5. Importance of Economy in Society

Whether micro or macroeconomics is concerned, common people’s involvement is always vital to the functioning of an economy. The labor involved in making products and the consumers who buy these products are all common citizens of a state. From managing a state’s affairs in macroeconomics to managing a household budget, the transactions are interlinked. Therefore, it is right to say the importance of economy in society is equivalent to a state’s economy. The importance of the economy in society is evident in many ways.

6. Fight Poverty

The principles of economics can be used to create an effective economic model for a region that can help fight poverty by creating more jobs. For this purpose, economic experts can formulate a system to expand existing businesses and companies – even outside of the country – creating more jobs for people from every region. Once more people have jobs, the individuals’ finances will improve, collectively decreasing the country’s poverty. Once the issue of poverty is settled, there will be a decrease in the crime rate as well, as many times poverty is the cause of come crimes.

7. Progress in Industrial Development

 Economic development paves the way for diversification and progression in different industries of a country. The more industries there are in a country, the more probability of success and innovation there is. With a strong economy, there is a wide margin of research and innovation, leading to new products or sectors in society.

8. Increase in Quality of Life

A strong economy comes with many benefits, such as improved infrastructure, good health, and education. When necessities of life are met, there is more chance for improving the quality of life in a region. Other than that, a strong economy can provide many opportunities for development to the citizens. Therefore, the growth of the economy in any society or a state is treasured.

Conclusion

 In conclusion, the importance of the economy can be seen how it affects different areas or sectors of our lives. Paying attention to economic development is the key to success in many other affairs of a state. Many factors should be taken under consideration while formulating an economic model of a country as they are either directly or indirectly linked to the country’s progress. Utilizing geography and resources is important. Creating a strong economy lessens the burden of national security threats to a state and develops a prosperous society.