The Economic System

The economic system. he term economic process refers to to those activities through which goods and services aimed at satisfying human needs are produced, distributed and used. For example: daily consumption of food and other goods and services by individuals; an ente rprise’s production of machine r y use d to produce othe r goods; or even the writing of a book on economic statistics intended to be bought by university students.

One of the fundamental characteristics of activities defined as economic processes is that they involve relations between various agents. the definition of economic agent is therefore absolutely fundamental in determining the nature of the economic processes: economic agent refers to a person or legal entity that plays an active role in an economic process. an economic agent can therefore be an individual consumer who purchases goods and services, an enterprise that organises factors of production to generate income, a worker who provides his or her labour in a production process, etc. these individual agents (to which economic theory habitually attributes preferences, objectives, behaviour, etc.) are then normally grouped into institutional sectors that represent groupings of institutional units (corporations, households, general government, etc.), each of which:

1. Is entitled to own goods or assets in its own right; it is therefore able to exchange the ownership of goods or assets in transactions with other institutional units; 
2. Is able to take economic decisions and engage in economic activities for which it is held to be directly responsible and accountable by law; 
3. Is able to incur liabilities on its own behalf, to take on other obligations or future commitments and to enter into contracts; 
4. Has either a complete set of accounts (including a balance sheet of assets and liabilities) or it would be possible and meaningful, from both an economic and legal viewpoint, to compile a complete set of accounts for the unit, if required.

These institutional units are the categories of economic agents normally referred to in the system of national accounts (sna).

All the agents within a given territory (a region, country, etc.) and the ways they interact with each other and with other agents outside that territory are defined as an economic system. an economic system is not only characterised by the physical or technological factors that determine how its production is oriented (i.e. mainly towards agriculture, industry, etc.), but also by cultural and institutional factors that regulate how it functions (laws, regulations, etc.). thus, there are systems in which the economic relations between individual agents are heavily regulated and systems that freely allow agents to undertake new activities or terminate existing activities. there are economic systems completely open to trade with other systems as well as highly regulated systems; systems in which a few large enterprises produce most of the goods and services and others with a vast number of small enterprises and only a few large ones.

the characteristics of an economic system are also important because they can influence the quality of the statistics describing how the system functions. For example, when economic systems are characterised by the presence of a few large enterprises, it is relatively simple to collect statistics to measure the functioning of the system, but when the economic system is composed of a myriad of small enterprises, it can become extremely difficult and/or time consuming to do so. similarly, in a system that has a particularly large “underground” (or “non-observed”) economy, i.e. the economy that is not visible to the tax and administrative authorities, production of accurate economic statistics can be a challenge.

An economic system is generally defined in terms of territorial boundaries. the economic territory is the area in which the units reside, operate and pursue their interests. traditionally, the following types of areas are identified:

1. Supranational economic systems: systems composed of groups of sovereign states that have come together through international treaties that set common standards for the functioning of national economic systems (for example, the group of countries that belong to the european Union);
2. National economic systems: systems having an economic territory that coincides with the administrative boundaries of a sovereign state (France, canada, etc.);
3. Regional economic systems: systems defined using the administrative boundaries of sub-national areas (regions, provinces, etc.);
4. Local economic systems: systems not defined on the basis of administrative boundaries, but in terms of specific economic, social or environmental characteristics (for example, “local labour systems” or “industrial districts”).

The concept of territory is extremely important in statistics because it allows us to distinguish between agents residing in a specific territory and non-resident agents, thereby making it possible to measure the contribution of each type of agent to economic variables, such as consumption, production, etc. if an agent has its “centre of economic interest” within the national territory, i.e. if that is where it conducts its most important economic transactions for a prolonged period (at least one year), it is defined as “resident”. if it does not, it is defined as “non-resident”.

N reality, with the development of international trade and the processes of “globalisation”, it has become extremely difficult to know the relations existing between resident and non-resident agents and to assess the contribution each makes to the overall economic system. given the expanding operations of multinationals and the introduction of electronic commerce, it is becoming increasingly difficult to describe in statistical terms the amounts and characteristics of the flow of goods, services and activities among agents residing in different countries and their interrelations.

Source

Understanding Economic Statistics An Oecd Perspective https://www.oecd.org/sdd/41746710.pdf