In capitalist country production activities are mainly carried out by capitalist enterprises.
A typical capitalist enterprise has one or several entrepreneurs (people who exercise control over major decisions and bear a large part of the risk associated with the firm/enterprise).
They may themselves supply the capital needed to run the enterprise, or they may borrow the capital. To carry out production they also need natural resources – a part consumed in the process of production (e.g. raw materials) and a part fixed (e.g.plots of land). And they need the most important element of human labour to carry out production.
This we shall refer to as labour. After producing output with the help of these three factors of production, namely capital, land and labour, the entrepreneur sells the product in the market.
The money that is earned is called revenue. Part of the revenue is paid out as rent for the service rendered by land, part of it is paid to capital as interest and part of it goes to labour as wages. The rest of the revenue is the earning of the entrepreneurs and it is called profit.
Profits are often used by the producers in the next period to buy new machinery or to build new factories, so that production can be expanded. These expenses which raise productive capacity are examples of investment expenditure.
In short, a capitalist economy can be defined as an economy in which most of the economic activities have the following characteristics
(a) there is private ownership of means of production
(b) production takes place for selling the output in the market
(c) there is sale and purchase of labour services at a price which is called the wage rate (the labour which is sold and purchased against wages is referred to as wage labour).
If we apply the above mentioned four criteria to the countries of the world we would find that capitalist countries have come into being only during the last three to four hundred years.
Moreover, strictly speaking, even at present, a handful of countries in North America, Europe and Asia will qualify as capitalist countries.
In many underdeveloped countries production (in agriculture especially) is carried out by peasant families. Wage labour is seldom used and most of the labour is performed by the family members themselves.
Production is not solely for the market; a great part of it is consumed by the family.
Neither do many peasant farms experience significant rise in capital stock over time. In many tribal societies the ownership of land does not exist; the land may belong to the whole tribe.
It is, however, true that many developing countries have a significant presence of production units which are organised according to capitalist principles. The production units will be called firms.
In a firm the entrepreneur (or entrepreneurs) is at the helm of affairs. She hires wage labour from the market, she employs the services of capital and land as well. After hiring these inputs she undertakes the task of production. Her motive for producing goods and services (referred to as output) is to sell them in the market and earn profits. In the process she undertakes risks and uncertainties.
For example, she may not get a high enough price for the goods she is producing; this may lead to fall in the profits that she earns.
It is to be noted that in a capitalist country the factors of production earn their incomes through the process of production and sale of the resultant output in the market.
In both the developed and developing countries, apart from the private capitalist sector, there is the institution of State. The role of the state includes framing laws, enforcing them and delivering justice.
The state, in many instances, undertakes production – apart from imposing taxes and spending money on building public infrastructure, running schools, colleges, providing health services etc.
These economic functions of the state have to be taken into account when we want to describe the economy of the country.
Apart from the firms and the government, there is another major sector in an economy which is called the household sector. By a household we mean a single individual who takes decisions relating to her own consumption, or a group of individuals for whom decisions relating to consumption are jointly determined.
Households also save and pay taxes. How do they get the money for these activities? We must remember that the households consist of people. These people work in firms as workers and earn wages. They are the ones who work in the government departments and earn salaries, or they are the owners of firms and earn profits.
Indeed the market in which the firms sell their products could not have been functioning without the
demand coming from the households. Moreover, they can also earn rent by leasing land or earn interest by lending capital.
So far we have described the major players in the domestic economy.
But all the countries of the world are also engaged in external trade. The external sector is the fourth important sector in our study. Trade with the external sector can be of two kinds:
1. The domestic country may sell goods to the rest of the world. These are called exports.
2. The economy may also buy goods from the rest of the world. These are called imports. Besides exports and imports, the rest of the world affects the domestic economy in other ways as well.
3. Capital from foreign countries may flow into the domestic country, or the domestic country may be exporting capital to foreign countries.