An economy is a system of trade that determines the allocation of scarce resources and their value, along with the currency people will accept in exchange for them. It’s a complicated network of relationships, influenced by the culture, history, political structure and laws of a place. People typically classify economies based on the amount of government control involved – at one end of the spectrum is a command economy with complete government control and at the other is a free market economy that has minimal government involvement. Philosopher Adam Smith codified the modern concept of an economy in his 1776 masterpiece, The Wealth of Nations.
Most countries operate in a mixed economy, which has some aspects of both a market-driven and a command economy. While a country’s government may set broad economic goals and regulate certain sectors, it allows free-market competition to determine most production and consumption outcomes. Businesses play a critical role in this system, retaining capital, reinvesting in research and development, and generating economic growth through profits.
The economic health of a country can be measured by its gross domestic product (GDP), which is the total value of all final goods and services produced within a nation during a given period. It is usually expressed in the country’s local currency and can be compared to GDP figures from other countries using either market exchange rates or purchasing power parity (PPP) exchange rates.
The calculation of GDP takes into account the expenditure approach, which includes the value of all final purchases made by individuals, and the income approach, which includes the compensation that employees receive, as well as the operating surpluses of companies (roughly sales less costs). However, not all productive activity is counted – unpaid labor and black-market activities are excluded because they’re difficult to measure.