The Economy: A Machine That Moves the World

Have you ever wondered why prices go up and down? Or why some periods have more jobs and others experience mass layoffs? The answer lies in how the economy works, that invisible system that determines whether your money is worth more or less, whether you get a job or not, and whether companies thrive or go bankrupt.

The economy is not just about numbers on a screen or news about markets. It is a colossal machine where we are all gears. From buying a coffee to a multinational closing a factory, everything is connected. Understanding how the economy functions gives you power: the power to anticipate what’s coming, to make better decisions, and to understand why the world moves the way it does.

A System of Connected Vessels

To understand how the economy works, you first need to know what it really is. The economy is the set of activities where goods and services are produced, exchanged, distributed, and consumed. It sounds abstract, but it is as concrete as your weekly grocery shopping.

Imagine a chain: one company extracts raw materials, another processes them, a third turns them into a product, and finally you buy it. At each link in that chain, money circulates, employees work, profits are realized. If one of those links weakens, the entire chain wobbles.

What truly fuels how the economy functions is a simple but brutal game: supply and demand. When everyone wants a product, its price rises. When no one wants it, it falls. Producers respond to that signal: if something sells well, they produce more; if not, they reduce production. This mechanism, repeated millions of times across thousands of markets, is what makes the economy a self-regulating system (although it doesn’t always work perfectly).

Who Participates in This Economic Dance

The economy does not exist without people. Everyone who spends money, everyone who produces, everyone who trades: they are parts of the same ecosystem. Companies, workers, governments, consumers. Even you, with your wallet, are an active participant in how the economy functions.

Economists have identified three main sectors where all this activity is divided:

The primary sector is responsible for extracting what nature offers us: minerals, oil, wood, food. This sector produces the raw materials that feed all the others.

The secondary sector takes those raw materials and transforms them. Factories, construction, manufacturing: here, a mineral becomes a machine, or cotton becomes clothing. This sector creates the physical products we use.

The tertiary sector is the services sector: distribution, advertising, banking, education, entertainment. Without this sector, products wouldn’t reach you, there would be no loans to buy a house, and trade as we know it wouldn’t exist.

Each sector depends on the other. Without raw materials, there is no manufacturing. Without manufactured goods, services have nothing to distribute. It’s a circle where disrupting one part affects all.

The Rhythm of the Economy: The Cycles

Here’s where it gets interesting: the economy does not grow in a straight line. It has rhythm. It goes upward, hits a peak, declines, and then rises again. This is what economists call an “economic cycle,” and understanding how the economy works involves accepting that it is always in motion.

A complete cycle has four phases, each felt differently:

Expansion: The market awakens like a hungry beast. It has just emerged from a crisis and everyone is optimistic. Jobs are created, people spend money, companies hire more workers. Stock prices rise, investment flows. It’s like a party where it seems money will never run out. Demand grows, production increases, and everyone gains.

Peak: It’s glory time. The economy is at its maximum capacity, using all its potential. But something curious happens here: prices stop rising, sales plateau a bit. Small companies disappear, absorbed by larger ones through mergers. Market participants keep smiling, but inside, there’s concern. Everyone feels something is about to change, even if they don’t want to admit it.

Recession: And then it arrives. Costs suddenly rise, demand falls. Companies that seemed invincible start to suffer. Profits decrease, stock prices fall, people lose jobs or shift to part-time work. Fear begins to seep in. Expenses are cut, investment freezes. It’s like when you see the party is winding down.

Depression: It’s the bottom. Deep pessimism takes over the market even when there are signs things could improve. Companies fail and go bankrupt, unemployment skyrockets, savings evaporate. The value of money drops. It’s the darkest point of the cycle, but also where the seed of the next expansion begins to form.

Three Speeds of Cycles

Not all cycles move at the same pace. There are three types that operate simultaneously:

Seasonal cycles: Last months. The Christmas shopping season is a classic example. Each season has its own demand pattern. They are predictable, but their impact on certain sectors is huge.

Economic fluctuations: Last years, sometimes a decade. They result from imbalances between supply and demand that are discovered too late. They are unpredictable and can cause severe economic crises. The economy takes years to recover from these cycles.

Structural fluctuations: The slow giants, lasting decades. They emerge from profound technological changes and social transformations. An example: the transition from an agricultural to an industrial economy, or now from industrial to digital. They can cause massive unemployment and widespread poverty, but also open huge opportunities for innovation.

What Makes the Economy Turn

There are countless factors that determine how the economy functions, but some are especially powerful:

Government policies are like the steering wheel. Governments can inject money into the economy (fiscal policy) through taxes and public spending. Or they can control how much money and credit circulate (monetary policy) via central banks. With these tools, they can accelerate a sluggish economy or slow down an overheated one.

Interest rates are the price of borrowing money. When they are low, borrowing is cheap, so more people buy homes, start businesses, make big investments. When they are high, people think twice. Central banks adjust these rates to influence the behavior of the entire economy.

International trade connects economies. Two countries can prosper by exchanging what one produces well with what the other produces well. But it can also mean loss of local jobs if workers can’t compete with foreign workers earning less.

The Microscope vs. The Telescope: Micro and Macro

How the economy works can be observed in two ways:

Microeconomics is the close-up view. It looks at how individuals, households, and specific companies make decisions. Why do coffee prices go up? How does it affect small cafes? What makes a person decide to change jobs? It’s the world of local decisions and individual markets.

Macroeconomics is the distant zoom. It looks at the entire economy of a country, or the world. It asks: What is the total growth? How many people are unemployed? At what rate are prices rising overall? How do different countries’ economies interact? It’s the game of big forces.

Both perspectives are essential. What happens microeconomically eventually affects macroeconomics. And what the government does macroeconomically influences what you can do microeconomically.

The Journey Continues

How the economy works is a question that never has a final answer. Because the economy is not a fixed clockwork mechanism. It is alive, constantly evolving, adapting to new technologies, markets, crises. What was true a decade ago might not be today.

But the core remains: it is a system of supply and demand, driven by trillions of individual decisions, guided (sometimes clumsily) by government policies, and subject to natural cycles of expansion and contraction.

Understanding how the economy functions won’t make you automatically rich, but it will give you the power to understand the world around you and make smarter decisions within it.