Question

Define Economic Systems. Explain the available economic systems, which economic systems do you think is good for developing countries. give reasons.

Answer 1

An economic system is a system of production, resource allocation, and distribution of goods and services within a society or a given geographic area. It includes various institutions, agencies, decision-making entities, and patterns of consumption that comprise the economic structure of a given community. All economic systems have three basic questions to ask: what to produce, how to produce and in what quantities, and who receives the output of production.

The study of economic systems includes how these various agencies and institutions are linked to one another, how information flows between them, and the social relations within the system. There are four primary types of economic systems in the world: traditional, command, market and mixed.

1. Traditional Economic System - focuses exclusively on goods and services that are directly related to its beliefs, customs, and traditions. It relies heavily on individuals and doesn’t usually show a significant degree of specialization and division of labor. Hence, this is the most basic and ancient type of economies. Rural areas where most economic activity revolves around farming and other traditional activities fall in this system. These economies often suffer from a lack of resources. Hence, traditional economies are usually not capable of generating the same amount of output or surplus that other types of economies can produce.

2. Command Economic System - is characterized by a dominant centralized power that controls a large part of all economic activity. This type of economy is most commonly found in communist countries. It is sometimes also referred to as a planned economic system, because most production decisions are made by the government and there is no free market at play. The government regulates the resources and most processes surrounding them, like the most valuable resources within the economy (e.g. oil, gold). Other parts, such as agriculture are often left to be regulated by the general population.

3. Market Economic System - relies on free markets and does not allow any kind of government involvement in the economy. In this system, the government does not control any resources and the entire system is regulated by the law of supply and demand. There is no real example of a pure market economy in the real world because all economies have at least some kind of government interference. A market economy allows private actors to become extremely powerful, especially those who own valuable resources. Thus, the distribution of wealth and other positive aspects of the high economic output may not always be beneficial for society as a whole.

4. Mixed Economic System – It is a mixture of market and command economic system. It is sometimes also referred to as a dual economy. It is used to describe market economies with a strong regulatory oversight and government control in specific areas (e.g. public goods and services). Most of the western economies are mixed economies. Most industries in those systems are privately owned whereas a small number of public utilities and services remain in government control. Thus, neither the private nor the government sector alone can maintain the economy, both play a critical part in the success of the system.

Mixed economies are widely considered an economic ideal for developing countries. In theory, they combine the advantages of both command and market economic systems. In practice however, it’s not always that easy. The extent of government control varies greatly and some governments tend to increase their power more than necessary.