MODULE OVERVIEW

People are now living in a complex world that takes place in a wide range of institutions with interrelated
economic activities. All countries have something in particular – they all face economic problems and they
nevertheless handle them in different ways. In some countries, the government plays a big part in making
economic decisions, while in others, decisions are left much more to the private sector. Even though this
is the case, the different economic actors, including people, business organizations, and the government
still carry out their respective roles in ensuring that resources properly allocated and economic goals are
being achieved in a society.

This module examines the structure of the economy and how the different types of economic systems
operate. The first section looks at the composition of the economy, particularly its kind, sectors, economic
players, economic activities, and economic goals. Understanding these concepts will provide a good
background on the structure of the economy as a whole. The second section covers the nature, functions,
and type of economic systems including the traditional economy, market economy, command economy,
and traditional economy. Knowing the characteristics of these various economic systems will give us
ideas on the workings of a free market and government intervention.

Although this module contains information regarding macroeconomics, these are needed to have deeper
understanding of the economic system which is a relevant topic in basic microeconomics.

LEARNING OBJECTIVES

After studying and completing this module, you should be able to

1. Define an economy.
2. Distinguish between the national economy and the global economy.
3. Recognize the roles of the players/agents of the economy.
4. Outline and explain the four economic activities, including production, distribution, exchange, and
consumption.
5. Assess the different economic goals.
6. Describe three fundamental questions that every economy must answer.
7. Define an economic system and outline its functions.
8. Compare and contrast the characteristics of economic system classifications, including traditional
economy, market economy, command economy, and mixed economy.

LEARNING CONTENTS

Economy Defined

Every country, regardless of its level of development, has an economy. The economy plays a crucial role
in determining how limited resources will be allocated to fulfill all the wants and needs of different
economic agents in a society.

The economy refers to the structure in which various economic activities are organized by economic
players, including individuals, business organizations, or governments.

National Economy versus Global Economy

The national economy encompasses all the economic activities related to production, distribution, trade,
and consumption of goods and services that take place locally or domestically. These inter-related
activities take place in a country to fulfill the wants and needs of those living and operating within the
economy.

The Philippines is an example of a national economy. Presently, the economy of the Philippines is the
36th largest economy in the world by nominal GDP, according to IMF data. It’s now a newly industrialized
country and one of Asia's fastest-growing economies with an estimated GDP of $356 billion in 2019.
On the other hand, the global economy covers all collective worldwide economic activities. It is
characterized by globalization, international trade, finance, and global investment. Currently, 193
economies make up the global economy. United States, China, Japan, Germany, and India are the
world’s top five largest economies. The world’s total GDP as of 2019 is valued at $86 trillion.

Economic Activities

All actions that occur at all levels within the economy involving the production, transfer, and consumption
of goods and services are called economic activities.
1. Production. The first phase of the economic activity that involves the transformation of inputs
into final products. A company that manufactures perfume, a worker in a shoe factory making
shoes, an engineer providing services, and a farmer which produces rice are all examples of
productive economic activity.
2. Distribution. The systematic way or process of how commodities and incomes are properly
allocated among economic resource owners. Examples of this economic activity include the
compensation received by a worker and the profit or revenue earned by a company. It is also
characterized by the use of distribution systems, including delivery trucks, roads, cargo ships,
airplanes, and so on to help move goods and services from the production site to the market.
3. Exchange. This activity requires any transfer of money or trading of products and services
between buyers and sellers in a marketplace. The buying and selling of securities in a stock
market and trading of commodities through exports and imports are examples of this economic
activity.
4. Consumption. This is the end phase of any economic activity, which requires the utilization of
goods and services to provide satisfaction to people. It represents the demand side of the market,
thus, involves the purchasing of goods and services in the economy. Buying an ice cream in a
grocery and eating it, in the end, is an example of consumption activity.

Sectors of the Economy

The production of goods and services in the economy is going on at different levels. An economy may be
analyzed in terms of its parts, referred to as economic sectors to determine who are engaged in different
activities. The three sectors of the economy are:
1. Primary Sector. The agricultural sector of the economy that is concerned with the production of
raw materials and includes activities directly related to agriculture and the use of natural
resources. Farming, fishing, forestry, mining, oil extraction, and raw processing are activities that
lie within this sector.
2. Secondary Sector. The industrial sector of the economy which covers the production of finished
goods, including the processing of materials produced by the primary sector. Manufacturing, fast-
moving consumer goods, energy utilities, construction, and heavy industries are the activities
associated with this sector.
3. Tertiary Sector. The service sector that covers the production and provision of intangible
commodities to consumers and businesses. Activities under this sector include transportation,
distribution, retail, banking and finance, information technology, tourism, education, healthcare,
etc.

Players of the Economy

 A huge number of people and organizations are involved in a modern economy. These people and
organizations are players of the economy who interact with one another and decide how an economy’s
resources are efficiently allocated. These economic players fall into four sectors as follows:
1. Households. These are individuals or groups of people living together and considered the
consuming-unit of the economy. They demand and consume the goods and services produced by
the economy. As resource owners, they provide and supply land, labor, and capital to firms,
governments, and the rest of the world. A family who buys and consumes food regularly is a
representation of a household.
2. Firms. They represent the business sector of the economy responsible for transforming inputs to
outputs. These are the business organizations within which land, labor, and capital are organized
for the production of goods or services. They supply economic goods and services to services to
different markets for consumption by households, governments, and the foreign sector. A
furniture company selling its products to a department store is a representation of a firm.
3. Government. The public sector of the economy responsible for the formulation and
implementation of economic policies. When it comes to the economy, the government functions
to provide public goods and services, maintain competition, correct externalities, stabilize the
economy, and redistribute the income. The Philippine government, which collects excise taxes
from businesses, represents the public sector.

4. Rest-of-the-World. This sector makes up foreign households, foreign firms, and foreign
Goals governments that supply resources and commodities to a domestic economy and demand
resources or commodities from a local economy. The trading of the Philippines to other countries
like the US and Japan, which sell domestic goods and buy imported goods, is a representation of
the rest-of-the-world.

Economic Goals

All countries in the world have particular objectives and they struggle to attain such goals. These goals
are pivotal to ensuring long-term stable economic success. Economic efficiency, economic equity,
economic security, and economic freedom include the goals at the micro-level. In contrast, economic
growth, full employment, economic stability, and a favorable balance of trade are the goals at the macro
level of the economy.

1. Economic efficiency. It ensures the utilization and allocation of the economy’s scarce resources.
This goal is achieved when available resources are efficiently produced at its optimum level
preventing any wastes.
2. Economic equity. This pertains to the fair or equitable distribution of income and wealth within a
society. A fair distribution of income means that the gap between the rich and the poor is too
narrow.
3. Economic security. This involves protection against economic risks where people in the
economy have a stable income for a decent living.
4. Economic freedom. This goal is achieved when every member of a society can make a choice
or take economic decisions. People are free to buy goods, own a property, prefer an employment
or establish a business within the economy not constrained by the government and others
5. Economic growth. This is the economy’s ability to produce goods and services within a specific
period. Gross Domestic Product measures the productive capacity of the economy that takes into
account the entire economic real output.
6. Full employment. It occurs when all available resources are utilized to capacity to produce
goods and services. This is expressed by the employment of the members of the labor force
measured by the employment or unemployment rate.
7. Economic stability. It enables the economy to reduce excessive fluctuations in people’s
standard of living. There is neither inflation nor inflation. In other words, the economy has stable
prices of goods and services.
 8. Reasonable balance of trade. This goal is achieved when the value of a nation's exports is more
than the value of its imports.

The Three Fundamental Economic Questions

Scarcity is a fundamental problem that society faces. Thus, to cope with scarcity, every country has to
properly allocate its limited resources. Regardless of their economic system, every society must answer
three fundamental questions concerning what to produce, how to produce, and for whom to produce.
1. What to produce? The first fundamental question that requires making decisions about the
categories and quantities of goods and services to be produced. If a country decides to
manufacture timber instead of automobiles because the country possesses a huge amount of the
former resource, then the first fundamental question is answered.
2. How to produce? This question involves decisions about what production methods or
techniques to use and how economic resources are to be combined in producing the final output.
If a firm relies heavily on the use of industrial robots rather than human labor in shipbuilding, then
the second question is answered.
3. For whom to produce? The last question involves decisions on how goods and services are
distributed among members of society. It answers how much every member should get and how
should this good or service be delivered to them. If a country exports 50% of its total textile
production and delivers this through cargo ships, then, the third question is answered.

Types of Economic System

Countries might differ in their economy’s structure because of the form of economic systems they adopt.
An economic system is a means of organizing the economy’s activities to manage the problem of
scarcity and resource allocation.
There are four different types of economic systems. These include:

1. Traditional Economy. A system in which the society decides according to traditions and
customs. This economy is characterized by the use of old and inefficient methods of production
because of the lack of access to technology and innovation. Resources are allocated based on
practices from the past generation. Examples of this economy include indigenous tribes in
different countries like the Kavango people of Namibia.
2. Market economy. An economic system in which private individuals own and manage most of the
country’s wealth and resources. It is sometimes called free enterprise or laissez-faire (to let do”
economy as there is no government intervention in a pure market economy. In a market
economy, households and firms determine what to produce, how to produce, and for whom the
goods to be produced. The government plays a limited role in the functioning of the economy.
This is characterized by private property ownership, freedom of choice and enterprise,
competition, markets and prices, economic incentives, technology, specialization, and the use of
money. Countries like Australia, New Zealand, Hong Kong, Singapore, and Switzerland have free
enterprise economies.
3. Command economy. An economic system characterized by public control and ownership of the
economy’s resources. In other words, the government is the central authority that makes all the
decisions regarding resource allocation. This is the opposite of a market economy where the
government plays a small role in the functioning of the economy. Countries that adopt mainly this
economic system include Cuba, Laos, Libya, Myanmar, Iran, and North Korea.

Mixed economy. It is a blended economic system that combines the characteristics of both market and
planned economies. Private individual decision-making and ownership of resources are combined with
government regulations. In a mixed economy, the major industries are owned or managed by the
government while the minor businesses belonged to the private sector. Businesses are allowed to pursue
their best self-interests, and the public sector is also permitted to intervene and carry out their economic
functions. In reality, most economies nowadays are mixed with varying degrees of government
intervention. Developed countries in Europe, such as Iceland, Sweden, France, the United Kingdom,
India, United States, are countries with mixed economies.