Economic systems

The way a country’s resources are owned and the way that country takes decisions as to what to

produce, how much to produce and how to distribute what has been produced determine the type

of economic system that particular country practices.

1. MARKET ECONOMY (also called FREE ENTERPRISE ECONOMIES or CAPITALIST ECONOMY)

2. CENTRALLY – PLANNED or CONTROLLED ECONOMY

3. MIXED ECONOMY

4.TRADITIONAL ECONOMY

1. MARKET ECONOMY :

e.g. USA, Japan

Private firms or individuals own means of production. They make choices about:

o What to produce

o How to produce

o For whom to produce

- What to produce is answered by consumers according their demand for goods & services

- How to produce is answered by the business- men. They will choose the production method,

which reduces their costs to reach the higher profit.

- For whom to produce – firms produce goods & services which consumers are willing and able to buy.

Role of government

1. To pass laws to protect businessmen &consumers

2. To issue money

3. To provide certain services – police

4. To prevent firms from dominating the market and to restrict the power of trade unions

5. Repair and maintain state properties

Advantages:

- Goods and services go where they are most in demand and free market responds quickly to people’s wants.

- No need for and overriding authority to determine allocation of goods&services

- Producers and consumers are free to make changes to suit their aims

- Competition and the opportunity to make large profits, greater efficiency, innovation

Disadvantages:

- It mis-allocates resources (to those with more dollars)

- It creates inequality of incomes

- It is not competent in providing certain services

- It leads to inefficiency (market imperfection)

- It can encourage the consumption of harmful goods - drugs 

2.Planned economy

e.g. Cuba, China, former Soviet Union

State (government) owns all means of production. Individuals are not permitted to own any property. Government + government planners makes choices about What, How and

For whom to produce.

- What to produce is answered by government planners, they make assumptions about consumers` needs and the mix of goods and services

- How to produce is answered by the government,planners according the input-output analysis.

- For whom to produce – for consumers through state outlets. Prices can’t change without state instructions. (Restrictions)

Role of government

1. Government make the most economic decisions with those on top of the hierarchy

giving economic commands to those further down the ladder.

2. Government plans, organizes and coordinates the whole production process in most industries.

3. Government is the employer of most workers and tells them how to do their jobs.

Advantages:

- There is more equal distribution of wealth and income

- Production is for need rather than profit.

- Long-term plans can be made taking into account a range of future needs such as population changes and the environment.

Disadvantages:

- Vast bureaucracies employing – supervisors, coordinators…

- People are poorly motivated

- Planners often get things wrong – shortages of surpluses of some goods

- Poor standard of living

3. MIXED ECONOMY

All Western European countries

The balance between state provision (government planning) and free market provision is more or less equal. The government decides the “degree” of mixing. They will decide how much business activity there will be in the private sector and the public sector.In the countries, where the government plays important - major economic role the social provision will tend to be greater, taxed higher and distribution of wealth and income more equal. Whereas in countries where the private sector plays the most important economic role, social provision is lower with fewer free goods and services, also taxes will be lower and the distribution of wealth and income less equal.(GB)

Some resources are allocated by the government and the rest by the market system.

Most decisions are taken in the market place but the government plays an important role in modifying the functioning market.

Role of government

- Sets laws and rules that regulate economic life - intervention to control or regulate markets

- Provide certain services e.g. education, police, defense healthcare

- Regulate business – to ensure that there is fair competition in the private sector

- Restricts the consuming harmful goods by making them illegal or placing high taxes on them

- Planning gives the government the power to give G&S, or money to the poorer people

PUBLIC SECTOR – is responsible for the supply of public goods & services and merit goods. These goods are provided free when used and are paid by taxes e.g. roads, healthcare, street lighting The central or local government makes decisions regarding resource allocation in the public sector.

In public sector, the state owns a significant proportion of production factors.

PRIVATE SECTOR – firms in response to the demand or consumers’ needs and wants make

production decisions

In the private sector individuals are allowed to own the factor of production.

Businesses are set up in this system by individuals to supply a wide variety of goods and services.

Competition exists between these firms. 

THE ROLE OF GOVERNMENT IN A MARKET (MIXED) ECONOMY 

There are various opinions of various economic thoughts about the role of government interventions.

Governments are generally argued to have four main macroeconomic goals:

- to maintain full employment

- to ensure price stability

- to achieve high level of economic growth

- to keep exports and imports in balance

4.Traditional economy:

A traditional economy is an original economic system in which traditions, customs, and beliefs shape the goods and products the society creates. Countries that use this type of economic system are often rural and farm-based. Also known as a subsistence economy, a traditional economy is defined by bartering and trading. Little surplus is produced, and if any excess goods are made, they are typically given to a ruling authority or landowner. A pure traditional economy has no changes in how it is done (there are few of these today). Examples of traditional economies include those of the Inuit or those of the tea plantations in India. Traditional economies are popularly conceived of as "primitive" or "undeveloped" economic systems, having tools or techniques seen as outdated. As with the notion of contemporary primitiveness and with modernity itself, the view that traditional economies are backwards is not shared by scholars in economics and anthropology.

Traditional economies may be based on custom and tradition or command, with economic decisions based on customs or beliefs of the community, family, clan, or tribe.