What is an “Economy”? And Why Should You Care?

There are some words and terms that we hear so often that we have an abstract sense of what they mean, but pressed to explain them to someone else, we find ourselves having to pause. One such term is? The economy. Here’s what it is.

Dr. Justin Robinson, a Professor of Finance and Dean of the Faculty of Social Sciences at the University of the West Indies, Cave Hill Campus, admits that “the economy” can be hard to define in simple terms, but says that as “human beings, we consume goods and services just for basic necessity and to enjoy life, and the economy seeks to capture all of that.”

In discussing this topic, it’s impossible not to mention another term that we’ve probably all heard, but have an even harder time explaining: GDP, or gross domestic product.

Professor Robinson breaks that down for us as well. “For practical purposes, when we talk about the economy and GDP, what we end up capturing is the final market value of goods and services.”

While GDP is a key economic indicator, he acknowledges that it is also an imperfect one, because it only captures activities for which there is payment attached. For example, the value of the household work a stay-at-home wife (or husband) does is not counted, yet if the family hired someone to do that same work, it would most likely be.

“Most likely” because goods and services provided in exchange for cash can also be missed when GDP is being measured. Professor Robinson explains that if someone works and is paid in cash and the cash doesn’t find its way into the banking system or the transaction isn’t captured in any of the mechanisms used by Government, such as income tax, NIS, and VAT, it isn’t likely to be counted.

This introduces the concept of the informal economy. Hair braiders, vendors, car washers, and taxi drivers might all form part of the informal economy if there is no formal record of the work that they do and the money that they are paid for it. As a result, some economies are actually much larger than the official measure of GDP shows.

Is Barbados one of those countries?

Professor Robinson revealed that studies have estimated the size of Barbados’ informal economy to be between 5 and 25 percent of GDP, which he says is relatively small compared to other countries in the region.

Another term that is frequently mentioned is small open economy. This refers to a country with a small population whose economic activity is heavily driven by international trade. Barbados falls into this category because of how much of what we use is imported. Professor Robinson estimates that figure to be around 80 percent.

Our deep reliance on imports is why there is so much emphasis placed on the level of international (foreign) reserves.

“It is perhaps the numbers we place the most emphasis on. To run Barbados, to live in Barbados, we need to have constant, ready access to foreign exchange, because trade openness means that you are buying a lot of the goods and services you need to sustain your quality of life. And once you’re getting it from outside your country, then you need foreign exchange. With trade dependence comes foreign exchange dependence, and we often think that foreign exchange is the lifeblood of the economy. If you want a new flat screen TV, you have to import it. You want a lifesaving medicine, it’s not made here, you have to get it in from outside, and you need the foreign exchange to facilitate that.”

It should be clear by now why all of this should matter to you. But in case it isn’t, Professor Robinson sums it up.

“You should pay attention because the economy has a direct impact on the quantity, quality, and prices of goods and services you need to live. It has a direct impact on the amount of income you can earn to sustain yourself and your family… And it has a direct impact on Government’s ability to provide a certain quantity and quality of services like education, healthcare, and garbage collection. It is an integral part of your life.”