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Economics Defined with Types, Indicators, and Systems

By Updated December 25, 2023ADAM HAYES

Reviewed by CHARLES POTTERS

Fact checked by TIMOTHY LI

What Is Economics? Economics is a social science that focuses on the production, distribution, and

consumption of goods and services, and analyzes the choices that individuals,

businesses, governments, and nations make to allocate resources.

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.

KEY TAKEAWAYS

Economics is the study of how people allocate scarce resources for

production, distribution, and consumption, both individually and

collectively.

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

two of the most widely used economic indicators.

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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.

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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

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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, 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.

What Are Economic Indicators? 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. 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

Retail sales

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.

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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. 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.

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

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.

Employment Data The Bureau of Labor Statistics (BLS) releases employment data in a report

called the nonfarm payrolls on the first Friday of each month. 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. 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

as a system of production where business owners organize resources including

tools, workers, and raw materials to produce goods for market consumption

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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

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.

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.

Who Has Influenced the Study of Economics in the 21st Century?

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PART OF

Guide to Economics

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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 effecting 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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