Author: Sarthak Bhalerao
Table of Contents
- What is an Economic System?
- Types of Economic Systems?
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 System
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.
Traditional Economic System:
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.
Command Economic System:
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 System:
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.