What Is the Economy?

There is a national commercial playing now where a kid asks the adults, “What is the economy?” The adults stumble a little on its definition and the kid finally says, “I’ll look it up.” This commercial always makes me smile. We hear news about the economy all the time.  However, to narrow it down and really define it can be quite elusive.

Investopedia.com defines the economy as “a complex system of interrelated production, consumption, and exchange activities, which ultimately determine how resources are allocated among participants. The production, consumption, and distribution of goods and services combine to fulfill the needs of those living and operating within the economy.”

Clear as mud, right? I would boil it down to this. The economy is anything in our world that impacts our ability to earn income and buy goods. There are all kinds and sizes of economies across the world based on where people live and the area around them. It may be fair to say, “What isn’t the economy?”. We’ll try to narrow it down here.

There are many statistics that are monitored as indicators of economic strength. Several of the main indicators identified and defined by Investopedia.com include:

. Gross Domestic Product (GDP). GDP is the total value of all of the completed goods and services produced by an economy during a period of one year. GDP of the United States is composed of consumption (goods purchased), business fixed investment, government spending, residential, net exports and change in private inventories. Consumption has been the primary driver of GDP for the past three years, contributing 68% to total GDP and growing 2.5% in third quarter 2024.

Inflation (or Deflation). Inflation in consumer prices is measured primarily by the consumer price index, which tracks the costs of goods and services from month to month. It breaks down its report into the vital areas of consumer spending such as food, energy and rent costs. In 2024 inflation has increased primarily in shelter and dining, recreation and other services while prices for core goods and energy have dropped slightly. The 50-year headline CPI growth has averaged 3.7%.

.Balance of Trade. An economy’s balance of trade is a comparison of the amount of money that is spent on imports of goods and services and the amount of money it earns of goods and services it exports. An economy that exports more than it imports is not necessarily in a better position than a country that imports more than it exports. The impact of each depends heavily on why this indicator is positive or negative. The U.S. has operated with a negative balance of trade deficit in recent years, meaning more goods are imported than exported. If the economy is benefitting from cheaper goods while producing and exporting more profitable goods. a negative balance could be beneficial.

These are just a few of the major factors indicating whether our economy is beneficial or not. For now, these indicators remain significantly positive. Employment in our communities is strong and businesses remain in a strong financial position to continue investing and providing opportunities for people to earn income. Inflation has been dropping and currently sits at a level lower than the 50-year average, which creates a favorable opportunity for people in our communities to purchase goods to live.