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ECONOMY ECONOMICS

Economics Defined with Types, Indicators,

and Systems

By ADAM HAYES Updated June 28, 2024

Reviewed by ROBERT C. KELLY

Fact checked by TIMOTHY LI

Part of the Series

Guide to Economics

What Is Economics?
Economics is a social science that focuses on the production, distribution, and
consumption of goods and services. The study of economics is primarily
concerned with analyzing the choices that individuals, businesses,
governments, and nations make to allocate limited resources. Economics has
ramifications on a wide range of other fields, including politics, psychology,
business, and law.

KEY TAKEAWAYS
Economics is the study of how people allocate scarce resources for
production, distribution, and consumption, both individually and
collectively.
The field of economics is connected with and has ramifications on
many others, such as politics, government, law, and business.
The two branches of economics are microeconomics and
macroeconomics.
Economics focuses on efficiency in production and exchange.
 Gross Domestic Product (GDP) and the Consumer Price Index (CPI) are
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two of the most widely used economic indicators.

Economics
Zoe Hansen / Investopedia

Understanding Economics
Assuming humans have unlimited wants within a world of limited means,
economists analyze how resources are allocated for production, distribution,
and consumption.

The study of microeconomics focuses on the choices of individuals and

businesses, and macroeconomics concentrates on the behavior of the economy
on an aggregate level.

One of the earliest recorded economists was the 8th-century B.C. Greek farmer
and poet Hesiod who wrote that labor, materials, and time needed to be
allocated efficiently to overcome scarcity. The publication of Adam Smith's
1776 book An Inquiry Into the Nature and Causes of the Wealth of Nations
sparked the beginning of the current Western contemporary economic theories.
[1]

Microeconomics
Microeconomics studies how individual consumers and firms make decisions to
allocate resources. Whether a single person, a household, or a business,
economists may analyze how these entities respond to changes in price and
why they demand what they do at particular price levels.
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Microeconomics analyzes how and why goods are valued differently, how
individuals make financial decisions, and how they trade, coordinate, and
cooperate.

Within the dynamics of supply and demand, the costs of producing goods and
services, and how labor is divided and allocated, microeconomics studies how
businesses are organized and how individuals approach uncertainty and risk in
their decision-making.

Macroeconomics
Macroeconomics is the branch of economics that studies the behavior and
performance of an economy as a whole. Its primary focus is recurrent economic
cycles and broad economic growth and development.

It focuses on foreign trade, government fiscal and monetary policy,

unemployment rates, the level of inflation, interest rates, the growth of total
production output, and business cycles that result in expansions, booms,
recessions, and depressions.

Using aggregate indicators, economists use macroeconomic models to help

formulate economic policies and strategies.

What Is the Role of an Economist?

An economist studies the relationship between a society's resources and its
production or output, and their opinions help shape economic policies related
to interest rates, tax laws, employment programs, international trade
agreements, and corporate strategies.

Economists analyze economic indicators such as gross domestic product and

the consumer price index to identify potential trends or make economic
forecasts.

According to the Bureau of Labor Statistics (BLS), 38% of all economists in the
United States work for a federal or state agency. Economists are also employed
as consultants, professors, by corporations, or as part of economic think tanks.
[2]
What Are Economic Indicators? TRADE
Economic indicators detail a country's economic performance. Published
periodically by governmental agencies or private organizations, economic
indicators often have a considerable effect on stocks, employment, and
international markets. They may predict future economic conditions that will
move markets and guide investment decisions.

Gross domestic product (GDP)

The gross domestic product (GDP) is considered the broadest measure of a
country's economic performance. It calculates the total market value of all
finished goods and services produced in a country in a given year. In the U.S.,
the Bureau of Economic Analysis (BEA) also issues a regular report during the
latter part of each month. [3] Many investors, analysts, and traders focus on the
advance GDP report and the preliminary report, both issued before the final
GDP figures because the GDP is considered a lagging indicator, meaning it can
confirm a trend but can't predict a trend.

GDPNow
The GDPNow forecasting model, used by the Federal Reserve,
provides a "nowcast" of the official estimate before its release by
estimating GDP growth using a methodology similar to the one
used by the U.S. Bureau of Economic Analysis. [4]

Retail sales
Reported by the U.S. Department of Commerce (DOC) during the middle of each
month, the retail sales report measures the total receipts, or dollar value, of all
merchandise sold in stores. [5] Sampling retailers across the country acts as a
proxy of consumer spending levels. Consumer spending represents more than
two-thirds of GDP, proving useful to gauge the economy's general direction. [6]

Industrial production
The industrial production report, released monthly by the Federal Reserve,
reports changes in the production of factories, mines, and utilities in the U.S.
One measure included in this report is the capacity utilization rate, which
estimates the portion of productive capacity that is being used rather than
standing idle in the economy. Capacity utilization in the range of 82% to 85% is
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considered "tight" and can increase the likelihood of price increases or supply
shortages in the near term. Levels below 80% are interpreted as showing
"slack" in the economy, which may increase the likelihood of a recession. [7]

Employment Data
The Bureau of Labor Statistics releases employment data in a report called the
nonfarm payrolls on the first Friday of each month. [8] Sharp increases in
employment indicate prosperous economic growth and potential contractions
may be imminent if significant decreases occur. These are generalizations,
however, and it is important to consider the current position of the economy.

Consumer Price Index (CPI)

The Consumer Price Index (CPI), also issued by the BLS, measures the level of
retail price changes, and the costs that consumers pay, and is the benchmark
for measuring inflation. Using a basket that is representative of the goods and
services in the economy, the CPI compares the price changes month after
month and year after year. [9] This report is an important economic indicator
and its release can increase volatility in equity, fixed income, and forex markets.
Greater-than-expected price increases are considered a sign of inflation, which
will likely cause the underlying currency to depreciate.

Economic Systems
Five economic systems illustrate historical practices used to allocate resources
to meet the needs of the individual and society.

Primitivism
In primitive agrarian societies, individuals produced necessities from building
dwellings, growing crops, and hunting game at the household or tribal level.

Feudalism
A political and economic system of Europe from the 9th to 15th century,
feudalism was defined by the lords who held land and leased it to peasants for
production, who received a promise of safety and security from the lord.

Capitalism
With the advent of the industrial revolution, capitalism emerged and is defined
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as a system of production where business owners organize resources including
tools, workers, and raw materials to produce goods for market consumption
and earn profits. Supply and demand set prices in markets in a way that can
serve the best interests of society.

Socialism
Socialism is a form of a cooperative production economy. Economic socialism is
a system of production in which there is limited or hybrid private ownership of
the means of production. Prices, profits, and losses are not the determining
factors used to establish who engages in the production, what to produce and
how to produce it.

Communism
Communism holds that all economic activity is centralized through the
coordination of state-sponsored central planners with common ownership of
production and distribution.

Schools of Economic Theory

Many economic theories have evolved as societies and markets have grown and
changed. However, three disciplines of economics, neoclassical, Keynesian, and
Marxian, have influenced modern society.

The principles of neoclassical economics are often used as a framework to

illustrate the virtues of capitalism, including the tendency of market prices to
reach equilibrium as the volume of supply and demand changes. The optimal
valuation of resources emerges from the forces of individual desire and scarcity.

John Maynard Keynes developed the theory of Keynesian economics during the
Great Depression. Arguing against neoclassical theory, Keynes showed that
restrained markets and government intervention in markets create a stable and
equitable economic system. He advocated for a monetary policy designed to
boost demand and investor confidence during economic downturns.

Marxian economics is defined in Karl Marx's work Das Kapital. Marxian

economics is a rejection of the classical view of economics, arguing against the
idea that the free market, an economic system determined by supply and
demand with little or no government control, benefits society. He espoused
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that capitalism only benefits a select few and that the ruling class becomes
richer by extracting value out of cheap labor provided by the working class. [10]

What Is a Command Economy?

A command economy is an economy in which production, investment, prices,
and incomes are determined centrally by a government. A communist society
has a command economy.

What Is Behavioral Economics?

Behavioral economics combines psychology, judgment, decision-making, and
economics to understand human behavior. Branches of economic thought
continue to grow and change. One such example is the progressive branch of
bioeconomics that models economic decisions in terms of managing resources.

Who Has Influenced the Study of Economics in the 21st

Century?
Since 2000, several economists have won the Nobel Prize in economics,
including David Card for his contributions to labor economics, Angus Deaton for
his study of consumption, poverty, and welfare, and Paul Krugman for his
analysis of trade patterns.

The Bottom Line

Economics is a branch of the social sciences focused on the production,
distribution, and consumption of goods and services. Microeconomics is a type
of economics that is concerned with the behavior of individual people and
businesses, while macroeconomics considers broader trends affecting nations
and larger economies. In the U.S., a number of key economic indicators,
including GDP and CPI, are important tools for economists to measure trends
and make forecasts.
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ARTICLE SOURCES

Part of the Series

Guide to Economics

Introduction to Economics

1 Economics Defined with Types, Indicators, and Systems

CURRENT ARTICLE

2 Economy Definition
NEXT UP

3 History of Economics

4 Is Economics a Science?

5 Understanding Finance vs. Economics

6 Macroeconomics

7 Microeconomics

Economic Concepts and Theories

Economic Indicators

Real World Economies

Related Terms
Retail Sales: Definition, Measurement, and Use As an
Economic Indicator
Retail sales tracks consumer demand for finished goods by measuring the purchases of
durable and non-durable goods over a defined period of time. more

Real Economic Growth Rate: Definition, Calculation, and

Uses
The real economic growth rate is a measure of economic growth that adjusts for inflation
and is expressed as a percentage. more
Price Inflation: What It Is and How to Measure TRADE
Price inflation is an increase in the price of a collection of goods and services over a
certain time period caused by strong demand and supply shortages. more

Lorenz Curve
The Lorenz curve is a graphical representation of wealth or income distribution. more

Core Durable Goods Orders: What They Are and How They
Work
Core durable goods orders refers to new orders for U.S. core durable goods, which are the
total durable goods orders excluding transportation equipment. more

Maximum Wage: What It Is, How It Works, and Examples

A maximum wage is a price ceiling on compensation paid to employees. more

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