ECONOMIC
SYSTEMS
[Link] Datey
Founder Director –QUEST EDUSTATION Trainings and Learning
solutions
Economic Systems- what we will learn n
discuss
Describe and differentiate between major different economic systems
In a society, the economic system answers three fundamental
questions:
What do we produce?
How do we produce it?
For whom do we produce it?
Practically speaking, this translates as who owns the factors of
production and who decides what and how much to produce and
associated pricing.
This presentation introduces the major economic systems.
We’ll also discuss
The characteristics and management implications of each system,
such as the role of government or a ruler/ruling party.
It also highlights factors that interfere with the conceptually ideal free
market system.
Although a free and competitive market is the economic ideal in
terms of efficiency, it may not be the ideal in terms of representing a
society’s values.
What is an Economic System?
An economic system is an arrangement made by governments to
distribute and organise available resources, goods and services all
through a country or a geographic region.
It takes into account the factors of production – labour, capital, and
resource.
So, we can say
An economic system is a network that forms the
economic relationships between individuals in
society. In other words, how the people of a nation
come together to create a complex whole and
conduct economic transactions with each other.
Key Points
An economic system refers to the framework by
which individuals conduct business and trade with
each other.
There are four types of economic systems –
traditional, socialist/command, capitalist/market,
and a mixed economy.
Traditional Economy
A traditional economy, as the name suggests, is based on a
traditional approach.
These economies are based on ancient rules and are the most basic
type of economy.
The focus in a traditional economy is only on the goods and
services that match their customs, beliefs, and history.
Such traditional economies tend to focus primarily on agriculture,
cattle herding, fishing etc.
A traditional economy use the barter system and has no concept of
currency or money.
Contd…
Their economies center around their tribes or
families. Such economies believe in only producing
what and how much they require.
They find no need to produce any market surplus.
There is no concept of trading.
This type of traditional economy is suited to
underdevelop and developing economies. Even
today such economies can be found in some
pockets of Africa and the Middle East.
Command Economy (Socialism)
A command economy is the opposite of a free market economy. In a
command economy system, there is one centralized power, which in
most cases is the government.
The government makes all decisions regarding the economy. It will
decide which goods and services will be produced, in what quantities.
The price will also be determined by such centralized power and not
by market forces.
Contd…
A command economy is a characteristic trait of a
communist country. Countries like Cuba, China, and
the previous USSR are practical examples of this
command economy system.
Such economies are also known as Planned
Economies because the government plans all the
forces of the economy, nothing is decided by the
free market.
Market Economy (Capitalism)
This is the complete opposite of a command economy.
A free market economy relies entirely on the free
market and free market trends. There is no
involvement or interference from the government or
any such controlling power.
This means there are no rules or regulations imposed
on either buyers or sellers.
The entire economy is determined by the participants
of the economy and the laws of demand and supply.
Contd…
Theoretically, free market economy can
show very high levels of growth. It makes
private organizations (only these exist) very
powerful and influential in the country.
So it may create an imbalance of wealth
and a scenario where the rich get richer and
poor get poorer.
Realistically there are no perfect free market
economies in the world. Every economy has some
level of government regulation as it is necessary.
Like for example laws that prevent monopolies, or
restrict production of harmful substances.
Even anti-pollution laws that affect production are a
hindrance for a market economy. So in the modern
world free market is a subjective definition.
Currently, the United States is
considered the epitome of
capitalism.
Hong Kong is also a good example
of a free market economy.
Mixed Economy
A mixed economy is a perfect marriage between a
command economy and a free market economy.
So, by and large, the economy is free of government
intervention.
But the government will regulate and oversee specific
sensitive areas of the economy like transportation,
public services, defence etc.
Such an economy is known as a dual economy.
The best examples of such a mixed economy are
India and France.
Contd..
Such a mixed economy allows private businesses the
freedom to operate in the economy with minimum
oversight.
At the same time, the government can regulate the
economy so it does not adversely affect the public
interests.
Both public sector and private sector can co-exist
peacefully in one economy.
It is the perfect blend of socialism and capitalism. In fact,
most economies of the world are currently considered as
mixed economies.
What is Meant by a Mixed Economic
System?
A mixed economic system combines both the
market economic system and command economic
system.
Most of the countries, in the present-day context,
follow a mixed economic system.
It has to maintain a fine balance between
government control and the free market.
RECAP
Themain types of an economic system
are – capitalist economy, socialist
economy, mixed economy.
Eachof these economic systems has its
characteristics and is distinct from one
another.
To recap, economic systems determine
the following:
What to produce?
How to produce it?
Who gets it?
In a planned economy, government
controls the factors of production:
In a true communist economy, there is no private
property—everyone owns the factors of production.
This type of planned economy is called a command
economy.
In a socialist economy, there is some private
property and some private control of industry.
In a free-market (capitalist) economy, individuals
own the factors of production.
Privately owned businesses produce
products.
Consumers choose the products they prefer causing
the companies that product them to make more
profit.
Even in generally free market economies,
governments will Maintain the rule of law
Create public goods and services such as roads and
education.
Step in when the market gets things wrong (e.g.,
setting minimum wage, establishing environmental
standards)
In reality, economies are neither completely
free-market nor completely planned. Neither
exists in “pure” form, since all societies and
governments regulate their economies to
varying degrees.
Difference between Types of Economy
Parameters Market Economic Command Economic Mixed Economic System
System System
Determination Demand and supply The central authority, Price is influenced by
of price in a market most likely the market forces of demand
determine the price government, decides and supply as well as
prices of goods and government regulations, in
services certain instances
Property Ownership vests There is public Property is owned by both
ownership with private entities ownership of property public and private entities
Production Production is The underlying Production in a mixed
undertaken only objective of production economy includes both
with a profit motive is social welfare profit motive and social
welfare
Competition There exists There is no competition Only entities in private
competition among in a market owing to sector experience
entities present in State ownership of competition
such market firms.
Government Government has The government retains Government has a full
intervention very less role to play full control over firms holding in the public sector
in a market but a limited role in its
economic system private counterpart
Economic Sectors
1. Primary Sector
Primary sector in an economy has a direct interface
with the environment for purposes of production.
Instances of the primary sector are agriculture,
farming, mining, and fishing, among others.
Importance of the primary sector relates to the
harvesting of products or extraction from the
environment for procuring basic food and raw
material. The end purpose of the primary sector is
to utilise natural resources optimally.
2. Secondary Sector
In the secondary sector of an economy, raw materials
are converted into products that are fit for both
consumption or sale and helps to move away from a
primitive economic system. For example, the secondary
sector helps a country to move from agriculture or other
similar activities towards a developing market.
In India, the secondary sector holds about 20% of gross
domestic product. It helps to provide greater job
opportunities to the populace at large.
3. Tertiary Sector
The Tertiary sector primarily covers the service sector,
and therefore, focuses on service exchanges and
production. Examples of the tertiary sector are –
insurance, banking, communication and transportation,
among others.
The tertiary sector's significance is on the rise due to
rapid technological developments in various basic
essential services. These basic services include
healthcare, police, banking, etc.
A most significant benefit of the tertiary sector is that it
has a lower barrier of entry for businesses.
4. Quaternary Sector
The quaternary sector of the economy is based
upon the economic activity that is associated with
either the intellectual or knowledge-based economy.
It consists of those industries providing information
services, such as computing, ICT (information and
communication technologies), consultancy (offering
advice to businesses) and R&D (research,
particularly in scientific fields).
Economic Growth vs. Economic
Development
Reflect and answer these
questions
What Are The 4 Main Types Of Economic
Systems?
What Are The Examples Of Economic
System?
How Does The Economic System Work?
What are the two categories of economy
on the basis of level of development?
Reflect and answer these
questions
Distinguish
between economic growth
and economic development
Giveeconomic factors of determinants
of development.
What are the non-economic factors
affecting development?
