It encompasses everything that is bought and sold or otherwise exchanged, including public services like education. The real economy is incredibly complex, and inherently uncontrollable. Stop and think hard about any product you consume. Me, I'm looking at a book of matches that cost less than 3 cents. That is a miracle because no one person or company can make a book of matches, let alone put the matches in the store for less than 3 cents.
Every product has a supply chain that stretches back as far as the eye can see.
The answer to all the questions is that we collectively make these decisions. Our interests, our families, our needs and our desires drive our individual choices. Add all the individual choices together and you have the real economy, the economy the counts. A man named Adam Smith first described this collective decision making in 1776. The invisible hand is what makes a book of matches available for less than 3 cents and the invisible hand decides which will be the most popular movie or soft drink.