Economy why is it important

Many of the poorest people in the world rely on subsistence farming and do not have a monetary income. To take this into account and make a fair comparison of their living standards, the statisticians that produce these figures estimate the monetary value of their home production and add it to their income. Again, the prices of goods and services are taken into account: these measure real incomes. As explained before, incomes are adjusted for price differences between countries and they are also adjusted for inflation.

Global economic growth can be seen in this chart as an increasing share of the population living on higher incomes. In the following 17 years this share fell by 22 percentage points.

In and — during the economic recession that followed the pandemic — the size of the world economy declined and the share of people in poverty increased. As soon as global data for this period is available we will update this chart, but for now only preliminary estimates are available.

The data shows that global poverty has declined, no matter what poverty line you choose. It also shows that the majority of the world still lives on very low incomes. Most people in the world do not have access to them. An advantage of household survey data over GDP per capita is that it captures the inequality of incomes within a country. GDP per capita is a broader measure of real income and in contrast to survey income, it also takes government expenditures into account.

A lot of thinking has gone into the construction of this very prominent metric so that it is comparable not only over time, but also across countries. Another advantage of this measure is that historians have reconstructed estimates of GDP per capita that go back many centuries. This historical research is an extremely laborious task and researchers have dedicated many years of work to these reconstructions. The chart shows how average incomes in different world regions changed over the last two centuries.

Looking at the latest data you see again the very large inequality between different parts of the world today. You now also see the history of how we got here: small increases in production in some world regions and very large increases in those regions where people have the highest incomes today. One of the very first countries to achieve sustained economic growth was the United Kingdom.

It is no accident that the shape of this chart is very similar to the chart on book production at the beginning of this text — very low and almost flat for many generations and then quickly rising. Both of these developments are driven by changes in production.

Average income corresponds to average production and societies around the world were able to produce very few goods and services in the past.

There were no major exceptions to this reality. As we see in this chart, global inequality was much lower than today: the majority of people around the world were very poor. But in addition to this you have to consider that all the goods and services that were developed since then disappear — no bicycle, no internet, no antibiotics. The printing press was an exceptionally early innovation in production technology; most innovations happened in the last years.

The starting point of this rise out of poverty is called the Industrial Revolution. The printing press made it possible to produce more books. The many innovations that make up the Industrial Revolution made it possible to increase the production of many goods and services. Compare the effort that it takes for a farmer to reap corn with a scythe to the possibilities of a farmer with a tractor or a combined harvester; or think of the technologies that made overland travel faster — from walking on foot to traveling in a horse buggy to taking the train or car; or think of the effort it took to build those roads that the buggies once traveled on with the modern machinery that allows us to produce the corresponding public infrastructure today.

The production of a myriad of different goods and services followed trajectories very similar to the production of books — flat and low in the past and then steeply increasing. The rise of average income that we see in this chart is the result of the aggregation of all these many production increases. In the past, before societies achieved economic growth, the only way for anyone to become richer was for someone else to become poorer; the economy was a zero-sum game.

In a society that achieves economic growth this is no longer the case. When average incomes increase it becomes possible that people become richer without someone else becoming poorer.

This transition from a zero-sum to a positive-sum economy is the most important change in economic history I wrote about it here , and made it possible for entire societies to leave the extreme poverty of the past behind. In the top left panel you can see how global poverty has declined as incomes increased; in the other eight panels you see the same all world regions separately. The starting point of each trajectory shows the data for and tells us that two centuries ago the majority of people lived in extreme poverty, no matter where in the world they were at home.

Back then it was widely believed that widespread poverty was inevitable. But this turned out to be wrong.

The trajectories show how incomes and poverty have changed in each world region. All regions achieved growth — the production and quality of goods and services that people need increased — and the share living in extreme poverty declined. Since then all world regions have made progress against extreme poverty — some much earlier than others —, but in particular in Sub-Saharan Africa the share living in deep poverty is still very high.

The last two centuries were the first time in human history that societies have achieved sustained economic growth and the decline of global poverty is one of the most important achievements in history. But it is still a very long way to go. This is what we see in this final chart. The dark red line shows the share living in extreme poverty that we just discussed. Even after two centuries of progress we are still in the early stages. The history of global poverty reduction has only just begun. This is very much the case for global poverty.

The world is much less poor than in the past, but it is still very poor and it remains one of the largest problems we face. Some writers suggest we can end poverty by simply reducing global inequality. This is not the case.

But it is important to be clear that a reduction of inequality alone would still mean that billions around the world would live in very poor material conditions. He and his contemporaries believed that economies evolved from pre-historic bartering systems to money-driven and eventually credit-based economies. During the 19th century, technology and the growth of international trade created stronger ties among countries, a process that accelerated into the Great Depression and World War II.

After 50 years of the Cold War, the late 20th and early 21st centuries have seen a renewed globalization of economies. Actively scan device characteristics for identification. Use precise geolocation data. Select personalised content. Create a personalised content profile. Measure ad performance. Select basic ads. Create a personalised ads profile. Select personalised ads. Apply market research to generate audience insights.

Measure content performance. Develop and improve products. List of Partners vendors. Your Money. Personal Finance. Your Practice. Popular Courses. Economy Economics. Part Of. So why do we not each just produce all of the things we consume? The simple answer is most of us do not know how, but that is not the main reason. When you study economics, you will discover that the obvious choice is not always the right answer—or at least the complete answer.

Studying economics teaches you to think in a different of way. Think back to pioneer days, when individuals knew how to do so much more than we do today, from building their homes, to growing their crops, to hunting for food, to repairing their equipment. Most of us do not know how to do all—or any—of those things.

It is not because we could not learn. Rather, we do not have to. The reason why is something called the division and specialization of labor , a production innovation first put forth by Adam Smith , Figure 2 , in his book, The Wealth of Nations.

The formal study of economics began when Adam Smith — published his famous book The Wealth of Nations in Many authors had written on economics in the centuries before Smith, but he was the first to address the subject in a comprehensive way. In the first chapter, Smith introduces the division of labor , which means that the way a good or service is produced is divided into a number of tasks that are performed by different workers, instead of all the tasks being done by the same person.

To illustrate the division of labor, Smith counted how many tasks went into making a pin: drawing out a piece of wire, cutting it to the right length, straightening it, putting a head on one end and a point on the other, and packaging pins for sale, to name just a few.

Smith counted 18 distinct tasks that were often done by different people—all for a pin, believe it or not! Modern businesses divide tasks as well. Even a relatively simple business like a restaurant divides up the task of serving meals into a range of jobs like top chef, sous chefs, less-skilled kitchen help, servers to wait on the tables, a greeter at the door, janitors to clean up, and a business manager to handle paychecks and bills—not to mention the economic connections a restaurant has with suppliers of food, furniture, kitchen equipment, and the building where it is located.

A complex business like a large manufacturing factory, such as the shoe factory shown in Figure 3 , or a hospital can have hundreds of job classifications. When the tasks involved with producing a good or service are divided and subdivided, workers and businesses can produce a greater quantity of output. In his observations of pin factories, Smith observed that one worker alone might make 20 pins in a day, but that a small business of 10 workers some of whom would need to do two or three of the 18 tasks involved with pin-making , could make 48, pins in a day.

How can a group of workers, each specializing in certain tasks, produce so much more than the same number of workers who try to produce the entire good or service by themselves? Smith offered three reasons. First, specialization in a particular small job allows workers to focus on the parts of the production process where they have an advantage.

In later chapters, we will develop this idea by discussing comparative advantage. People have different skills, talents, and interests, so they will be better at some jobs than at others. The particular advantages may be based on educational choices, which are in turn shaped by interests and talents. Only those with medical degrees qualify to become doctors, for instance. For some goods, specialization will be affected by geography—it is easier to be a wheat farmer in North Dakota than in Florida, but easier to run a tourist hotel in Florida than in North Dakota.

If you live in or near a big city, it is easier to attract enough customers to operate a successful dry cleaning business or movie theater than if you live in a sparsely populated rural area. Whatever the reason, if people specialize in the production of what they do best, they will be more productive than if they produce a combination of things, some of which they are good at and some of which they are not.

Second, workers who specialize in certain tasks often learn to produce more quickly and with higher quality. Nordhaus, who define economics as follows in the edition of their well-known text, Economics :. Economics is the study of how societies use scarce resources to produce valuable commodities and distribute them among different people.

Behind this definition are two key ideas in economics: that goods are scarce and that society must use its resources efficiently. Indeed, economics is an important subject because of the fact of scarcity and the desire for efficiency. Samuelson and Nordhaus also provide some insights into the role of economists in Chapter 1 of their book. They declare that, "Throughout the world economists are laboring to collect data and improve our understanding of economic trends.

Economic analysis, both theoretical and empirical, can generate important insights into individual and aggregate behavior and relationships, and help in society's efforts to use scarce resources in a more efficient manner. Samuelson and Nordhaus also have an answer to the second part of your question about the need for economists, when they write:.