We always hear about Experts, Shop Owners and Bankers bang on about the Economy all of the time in the media because it is more important than the likes of you and me think.
Basically it measures the amount of business activity happening in a country or region and focuses on the output of the industries within that country or region and how much "stuff" is being bought and sold.
However it is of course more technical than this and I was taught an interesting way to remember the workings of the Economy. "The Barrel Analogy" is easy to get your head around. Imagine that our Economy (Let's say UK plc for example) is a huge barrel of water where the water level is the level of goods and services bought and sold in a typical year or Gross Domestic Product (GDP) as it is known. However we know that this level is subject to change with factors pushing it up or down. If this GDP level is growing slowly then we have Economic Growth. If it is more rapid then we have a Boom! On the other hand if the GDP does not grow we say it is in Economic Decline and if sustained for two consecutive quarters (half a year) then the region is in a Recession; which of course is a huge problem in our world at the moment. I write this several weeks after it was announced that the UK Economy declined by 0.7% in the first half of the year.
How does the water / GDP rise? Imagine that the barrel has no lid so that more water can fill it up. Therefore the factors at the top stimulate the Gross Domestic Product to grow. Firstly Government Spending helps this because their actions create business for companies. For example if the Government ordered that new Hospitals were to be built across the country, then construction companies would have to build them and of course, be paid to do so. In addition Consumer spending obviously assists because they ensure that more "stuff" is being produced and sold. This leads to revenue and hopefully Company spending as they invest in expansion and product development which in the long term, is aimed at creating more trade and sales. Finally Exports (selling goods to a customer or firm abroad) assist because imagine that the UK exports Bentley Cars to Saudi Arabia. Therefore some of Saudi's water from its barrel is transferred to the UK's barrel when the sale is made; thus pushing the level up.
However the UK's barrel has holes in the bottom, allowing some water to escape simultaneously. The UK Imports cheap T-Shirts from China and so it is China's Economy that benefits as opposed to the UK's. In addition Taxation hinders Economic growth in the form of VAT and Income Tax. This ultimately means that net incomes (After taxation and contributions etc.) are smaller so the consumer has less cash to spend on goods and services. And higher VAT means that goods become more expensive too. However for a company it means that they have less retained capital for expansion which causes further problems. Finally Consumer saving is an issue because it means that they chose not to spend their cash with firms but keep it in the bank. A weak Economy lowers consumer confidence as they hold on to as much cash as they can to survive through the troughs of Recession.
However interest rates are more of a hindrance (but also a stimulation too). If the Bank of England raises the base rate (which dictates to high street banks the interest rate for savings accounts) then they would much rather keep hold of their cash as it is more worthwhile to. Hence less is being spent.
So, in a nutshell that is the Economy. It applies to all Capitalist territories so simply substitute the "UK plc" for your country.
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