The economy, translating roughly from the Greek 'household management', is a broad term which covers all the operations and aspects of society which deal with production and consumption of money and moneymaking in individual countries, and in the world at large.
It relies on the idea that people are 'economic agents', or creatures which create and consume products and resources via 'economic transactions', or exchanges of money for goods and services. It's a very difficult term to imagine because it also considers culture, the environment, the political structure of a given country, and technological innovations.
Economies have existed since the beginning of human history, in a primitive form. The earliest form of economy is a barter system. A barter system is where people trade goods without using money. However, this system is inefficient, and was primarily used in ancient times before the invention of money. It can also be used by friends today. Using money is much more efficient, as it doesn't rely on both people in the 'transaction' to need each other's' goods like barter does. Money can be anything, but has historically used metals like gold and silver, and now relies on public trust.
The exchange of goods for money is just the surface of an economy, which includes all actions by everyone in the country which either create or consume anything, as well as all a nation's natural resources, whether they're being used or not. There are different economies which operate differently.
The market economy is one in which people buy and sell things in accordance with supply and demand, a theory which states that the more of something there is, the less it costs, and vice versa. In this economy, freedom of the 'market', or all the 'economic actors', to do business is most important.
People who believe in a free market, which includes the founders of the United States of America, believe that natural supply and demand will result in the best prices and deals for everyone, and in the most growth. However, today, the US government aims for a mixture of market economy and command economy.
The command economy is one in which the government controls all aspects of work by its citizens, including the creation of goods, how and to whom they're sold, and the prices of the goods. Basically, the government owns all jobs, and distributes them to citizens. The citizens produce goods, which are then also redistributed by the government.
This is the type of economy which is idealized by Communist countries, but has proven historically to be much less efficient than the market economy, mostly due to human error and high levels of corruption in the command economy. Essentially, government agents wind up stealing the goods they're supposed to be distributing.
The middle ground is a market economy which is steered by a government, and is the most common form in the world. In this middle ground, economists work with politicians to figure out how to best 'stimulate' an economy to grow. The government can grant a 'subsidy' to a certain group of people in one industry, which is basically a gift of money, which can allow those people to keep their products cheap for consumers.
The government can print money-causing inflation, which means money is worth less. The government can issue tariffs-which are taxes on foreign goods, which make them more expensive than local goods.
Through all these means, governments can affect the market economy. The ideal is to keep local goods cheap (but not too cheap), to keep as many people employed as possible. The government's effect on the economy has not always met this ideal, however, and the economy is an important issue in many elections worldwide every year, including those of the United States.
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