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Thursday, July 9, 2015

How the economy works.

We hear the word 'economy', pretty much everywhere in our daily lives. But what does economy means actually? And how does it actually works?
I will try my best to explain, in a simple manner, of how the economy actually works.

Now, when there are two parties, a business transaction happens. Business transactions are basically the exchange of money with goods or services. To make sure that everything is understandable, we need to identify the definition of each of the terms as given, goods, services and money.
Goods are tangible products (things we can touch) that we need in our lives to satisfy our wants, or needs. For examples, televisions, toasters, fans, computers, chairs, we can touch all these things and use it with accordance to our needs or wants.
Services in other hand are intangible commodity that satisfy our needs and wants as well. It is usually our desire to witness, feel or require from a certain skill that another party has acquired but it cannot be touched. Examples are as follows, asking a singer to perform in a concert at a wedding, or getting a massage from a masseuse, or attending lectures in academy institutions to learn about the economy.
Money is divided into two which are cash and credit.
Cash are, well, the cash you actually already have in your hand, or wallet, or bank account which you can consider to be yours in ownership.
Credit is basically cash that you own from someone else but will reimburse them in the future, or putting it simply in other word, loans.
A business transaction happens when you exchange your money (cash+credit) for goods and service, or so it goes the other way around.

Keep in mind that a person's spending is another person's income. Since business transaction is a process of exchanging that involves money, the party who receives the money in a business transaction will spend the money to yet another party to maintain productivity and then will sell it back to consumers to generate income.
Getting confused? Let's take a look in my self made-up example.
A is a machinery company, B is a bakery, and C is a wheat farmer. A exchanges money for bread to consume from B, so the money received in B will be used to buy more wheat from C in order to bake more breads. C in the other hand is going to need proper machinery in order to maintain an effective and efficient farming, in which he will use the income received to buy machines from A.
The circle goes on and on and on infinitely, and this is what we call, money circulation.

Now, since there are so many people in any country, hence, there is a lot of product/services demands with a counterpart of product/services supplies which makes business transaction plural and I meant it in a big way. There are millions of business transactions that is taking place as we speak or in this case, as I type. The business transactions does not focus on a single product only, I mean everyone does not trade only sugar with each other for the rest of our lives. The classification of goods is not one. People trades lots of stuff, and I mean A LOT. We have wheat, sugar, computers, chairs, pianos, violins, and well, basically, everything else.
Let's try to take wheat as an example. The classification of wheat in goods is a single market of wheat, or the wheat market. Remember, there are a lot of classifications in goods and services, and each of it has its own market. The market of trading computers, the market of trading sugars and so on. If we put all of these markets together, you will find that people are having business transactions in various types of markets, and voila, this is what you call 'the economy'.

Actually, there is this thing that drives the economy which is called, consumers spending. But I will try to post that in the future.
In the mean time, I hope you have found my blog or this post to be informative for your knowledge. As of now, thanks for reading my blog.

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