The economy of a country is the way money flows into, out of and around that country. More generally, it’s bigger than just money, it’s about ‘value’ and how value is exchanged. This post looks at the types of value exchange that makes up economies and how the economy is related to money. All to answer the question: what is the economy?
The economy of a country is the way it makes and uses and products and services. It’s ‘the production and consumption of goods and services’. It’s how the ‘value’ of products and skills circulate and change form. If there is a large amount of ‘value’ flow, an economy is in a good state. The type and amount of flow depends on many factors that have influenced a country in the past; its geographical location; it’s type of natural resources; its culture; its political position; the education of its people; law; and a heap of other factors.
Value means the value of a product (eg food), a trade (eg an electrician), a service (eg dentists), knowledge (eg tech industries). In the past you would have exchanged ‘value’. This would be like a farmer offering a kilo of vegetables for the service of a doctor or trading his vegetables for meat from the farm next door. Nowadays all of this exchange of value happens through money. The farmer sells his vegetables for money and uses that money to pay for the service of his electrician.
In the past, sailors would take textiles and exchange the textiles for sugar, tobacco, or spices. Nowadays, everything the UK exports is for money and everything it imports is for money too.
The role of money in the economy
Money is a symbol of value, not hard value in itself. If I give you a £20, I’m not giving you a piece of paper that is physically worth £20. I’m giving you a piece of paper that’s probably worth less than a penny, on the understanding that it will be exchangeable for £20 worth of goods. That could be a nice dinner or a 100,000 paperclips. In the same way, a £1 coin is not half the size of a £2 coin. It’s just worth half the number of paperclips because that is the meaning our society has assigned to it.
Money is worth more today than it will be in the future, not because the £1 is going to ‘shrink’ but because the understanding of what that £1 coin can be exchanged for is going to change. Money is also also worth more in some countries than in others. At certain times, money might be worth more in your pocket than it would be in a bank account. Sometimes the opposite is true. Sometimes -£1 is worth more than £1. So the role of money in the economy is not exactly the same as the value that is exchanged.
Money with time travelling value
Economies usually operate in negative money and exchange different amounts of debt for different profits on debt. More information about exactly how this comes about and how it works is in a different post (see here) but what’s is important to the economy in this post is that when you’re trading the ‘idea’ of current or future money, you end up valuing different things.
Imagine you were going to to buy a coffee from one of 3 cafes on a high street. You might compare the price or the quality of the coffee and make your decision. Now image you had to give someone on the high street £3 today for the ‘promise’ of a coffee in one years time. You would probably consider different things: do you know the barista to be trustworthy or might he run off with the money and not honour his promise of coffee? Is the business flourishing? If it’s not, might it shut down before next year? If the business is doing very well, might they start using more expensive coffee beans which increase the quality of their coffees next year so you end up getting even more value for money?
In financial service economies you end up exchanging money in different types of form; sometimes in cash, sometimes in debt, sometimes in the present and sometimes in the future. But the economy is still the overall amount of flow of that money and the general idea is, the more flow the better.
In summary: what is the economy?
So economies are the circulation and exchange of ‘value’ and that value can be in the form of a product or a service or a ‘promise’. Generally the more value floating around, the better the economy but to actually measure how good an economy is, there are other factors (such as GDP- see this post).
Not everything in a country has value that can be exchanged. For example, a mother at home raising her children doesn’t currently produce exchangeable value in our economy. Similarly, the quality of the air doesn’t hold exchange value. The presence of a tree, it’s beauty, the shade it creates, the fun that can be had climbing it has no value, whereas the wood of the tree does hold value as does the service of cutting it down. So there you see as an example that the decision on what holds value (even value as conceptual as a promise) is a decision that economists and politicians make.