This paper identifies challenges in managing resources in a Grid computing environment and proposes computational economy as a metaphor for effective management of resources and application scheduling. It identifies distributed resource management challenges and requirements of economy-based Grid systems, and discusses various representative economy-based systems, both historical and emerging, for cooperative and competitive trading of resources such as CPU cycles, storage, and network bandwidth. It presents an extensible, service-oriented Grid architecture driven by Grid economy and an approach,for its realization by leveraging various existing Grid technologies. It also presents commodity and auction models for resource allocation. The use of commodity economy model for resource management and application scheduling in both computational and data grids is also presented.