TYPES OF ECONOMIES
TYPES OF ECONOMIES
The economy is a major part of our life. The economy has been prevalent in our system since time immemorial. Decades long, we have come through many types of economic structures which have their own system of accommodation and planning. It is important for us to know the varied form of economies that plays a fundamental base in our up growth.
In this context, we are going to study the basics of the economic system and the types of an economy that prevailed and is prevailing.
Economic System Definition
Economic systems are the means that are adopted by governments of respective countries for the distribution of resources along with services and goods. Such an arrangement is dependent on production factors – capital, labor, physical resources, entrepreneurs, and information resources.
There are 4 main types of economy:
- Traditional Economic System
- FREE MARKET ECONOMY
- MIXED ECONOMY
- COMMAND ECONOMY
The majority of the types of economies are mixed economies but the extent to which they are, is varied.
Traditional Economic System
This economic system retains essential characteristics in which there is a very little specialization or division of labor.
A traditional economic system is most likely to be found in rural settings, or in such developing nations where farming is predominant. Such settings usually have very few resources to share.
FREE MARKET ECONOMY
A free market economy is an economy where all the resources are allocated by the price mechanism. This means the decision of what and for who to produce goods for is left to the price mechanism. Generally, in a free market, economic decisions are not made by the government or an active group. Instead, economic decision making is in the hands of individual consumers and producers.
There are no 100% free-market economies in the world today because, in every country, there is government intervention. However, in developing countries such as Thailand, government intervention is very minimal hence they may reflect what a free market economy looks like.
ADVANTAGES OF A FREE MARKET ECONOMY:
- There will be an increase in efficiency and lower prices. This is because there is a lot of competition in a free market economy.
- There are more financial incentives. This because entrepreneurs have more incentive to invest and take risks.
DISADVANTAGES OF A FREE MARKET ECONOMY:
- Monopolies may form. This is because of high competition which may lead to rival firms going out of business or getting taken over.
- There will be big swings in the business cycle. This is because there is no government intervention to protect the economy for recessions and unsustainable periods of economic growth.
COMMAND ECONOMY
A command or centrally planned economy is an economy where the government allocates all resources and there is no use of the price mechanism. This means the decisions of what and who to produce goods for is controlled by the government.
A command economy is good for when a country is in a national crisis as they work effectively. However, the standard of living tends to fall when a command economy is as adopted. An example of a command economy today is North Korea.
ADVANTAGES OF A COMMAND ECONOMY:
- There are high levels of output. This is because there is co-operation between firms rather than competition. Firms aim to maximize output rather than profit.
- There is a reduction in inequality. This is because the government controls all workers’ wages.
DISADVANTAGES OF A COMMAND ECONOMY:
- There may be shortages of goods. This is because the price mechanism is unable to operate which leads to an inefficient allocation of resources.
- There is slow economic growth. In command economies, there is usually little economic growth.
MIXED ECONOMY
In a mixed economy there are 2 sectors: private and public. Decisions on what and for who to produce goods for are made by both the public and private sectors.
Most developed countries today fall under this category.
A mixed economy has the advantages of the free market and command economies while avoiding their disadvantages. This is because governments intervene in markets when there is a failure. An example of this is government expenditure on education and healthcare.
In conclusion, there are 4 main types of economies: Traditional Economic System, free market, mixed and command. Most developed countries are mixed economies, there are very few command economies and no free market economies.