An economic system is a set of institutions and mechanisms that a society uses to allocate its resources and goods, and to produce, distribute, and consume goods and services.
What is an Economic System?
An Economic system is a means by which societies organize their available resources. These resources include goods and services spread across a geographic location or country. The economic system helps to regulate factors of production, including land, capital, labour, and physical resources. The economic system includes the combination of various institutions, agencies, entities, etc. All economic systems must confront and solve 4 fundamental economic problems:
- Quality and Quantity of goods produced
- How goods shall be produced?
- How the output will be distributed?
- When to produce?
Types of Economic Systems
There are different types of economies all across the globe. Every economy has a distinguishing character, although they share some basic features. Based on this, economic systems can be categorized into four main types: Traditional economies, Command economies, Mixed economies, and Market economies.
The traditional economic system is based on goods, services, and work, all of which follow certain established trends. It relies a lot on people, and there is very little division of labour or specialization. In essence, the traditional economy is very basic and the most ancient of the four types. This type of economic system is found in rural settings in second and third world nations where farming or other traditional income-generating activities are the predominant economic activities.
In a command system, there is a central authority – usually the government – that controls a significant portion of the economic structure. It is also known as a planned system. The command economic system is common in communist societies since production decisions are the preserve of the government. If an economy enjoys access to many resources, chances are that it may lean towards a command economic structure. In such a case, the government comes in and exercises control over the resources. Ideally, centralized control covers valuable resources such as gold or oil. The people regulate other less important sectors of the economy, such as agriculture.
Market economic systems are based on the concept of free markets. In other words, the interference of the government is minimal. The government exercises little control over resources, and it does not interfere with important segments of the economy. Instead, the regulation comes from the people and the relationship between supply and demand. The market economic system is mostly theoretical. From a theoretical point of view, a market economy facilitates substantial growth. Arguably, growth is highest under a market economic system. A market economy’s greatest downside is that it allows private entities to amass a lot of economic power, particularly those who own resources of great value. The distribution of resources is not equitable because those who succeed economically control most of them.
Mixed systems combine the characteristics of the market and command economic systems. For this reason, mixed systems are also known as dual systems. Sometimes the term is used to describe a market system under strict regulatory control. Many developed counties in the western hemisphere follow a mixed system. Most industries are private, while the rest, composed primarily of public services, are under the control of the government.
Economic System of India
The economic system of India is considered to be a mixed economy, which is a system that combines elements of capitalism and socialism. This means that the means of production are owned and controlled by a combination of private individuals, businesses, and the government.
In India, the private sector plays a significant role in the economy, with many small and large businesses operating in various industries such as agriculture, manufacturing, and services. However, the government also plays a significant role in the economy through state-owned enterprises and public sector undertakings.
India has a mixed economy because it has a range of economic systems, such as capitalist, socialist and mixed economy. This mixed economy system allows for private enterprise and market competition, but also includes government intervention and regulation in certain industries, such as energy and banking.
The government of India also plays a significant role in the country's development through policies such as the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), which aims to provide rural citizens with employment opportunities, and the Right to Education Act (RTE), which aims to provide free and compulsory education for all children.
In summary, The economic system of India is considered a mixed economy which is a system that combines elements of capitalism and socialism. In this system the means of production are owned and controlled by a combination of private individuals, businesses, and the government. The government of India plays a significant role in the country's development through policies such as employment guarantee and education for all.