Economic Vision

Historically, there have only been three types of economic systems: those based on tradition, the command or planned economy system, and the market economy system. In a market economy, individuals and companies make decisions regarding production and consumption through their interaction in the markets. In contrast, in a planned economy, these decisions are made by a central authority.

The economic systems of modern societies have elements of both market and planned economies; for this reason, they are called mixed economies. In modern economies, individuals specialize in specific tasks within the production process, which they then trade in markets to obtain the goods they need. Money is used as a medium of payment for the trade of various goods and services. Economic entities can be grouped into: households, non-financial corporations, financial corporations, the government, and non-profit organizations. Governments intervene in the economy through market regulation, the provision of public goods, tax collection, the payment of subsidies and transfers, controlling the money supply, etc.

The economic system is the way in which a specific country’s economy is organized; that is, it is the mechanism that determines what is produced, how it is produced, and how production is distributed among the population.

The quantity of goods and services produced in an economy depends on the amount of labor, human capital, physical capital, and technology. These resources are called factors of production, and economic growth depends on the evolution of these factors.

The distribution of production is carried out either by selling it through the market or by providing it free of charge or at non-market prices. This second distribution channel is managed by the government and non-profit organizations, primarily for services such as public administration, defense,

education, and healthcare. A portion of production is not distributed but is used by the producers themselves.

Households, the government, and non-profit institutions use disposable income for final consumption and savings. Savings are the source of financing for capital accumulation in an economy. Capital includes buildings, streets, roads, wells, tunnels, railways, hydraulic works, machinery, transport equipment, and ICT equipment, among others. As it is a factor of production, its accumulation allows for higher levels of production. In addition to national savings, it can be financed through capital transfers from the rest of the world and borrowing from the rest of the world.

The financial system performs several functions in an economy: it executes payments from one entity to another, pools resources, transfers resources from entities with a financing capacity to entities with a financing need, and manages risks. One notable financial instrument is money, which is a good accepted as a medium of payment. In modern economies, banknotes, coins, and deposits are considered money. On the other hand, currency is the monetary unit of an economy.

Gross Domestic Product (GDP) is defined as the value of goods and services produced in a country during a year, once the portion consumed in production has been deducted. It is the most widely used measure of an economy’s volume. Economists also use GDP per capita as an indicator of the standard of living. GDP per capita is the GDP divided by the country’s population. Therefore, it indicates the amount of production each person would receive if it were distributed equally.

Currently, the main component of world production is services, representing 70% of GDP. The secondary sector represents 30%, while the primary sector only reaches 3% of the total.