WHAT IS ECONOMIC SYSTEM

ECONOMIC SYSTEM

An economic system is a means by which societies or governments organize and distribute available resources, services, and goods across a geographic region or country.

Economic systems regulate the factors of production, including land, capital, labor, and physical resources.

An economic system encompasses many institutions, agencies, entities, decision-making processes, and patterns of consumption that comprise the economic structure of a given community.

TYPES OF ECONOMIC SYSTEM

Each economic system has its own distinguishing characteristics, although they all share some basic features.

Each economy functions based on a unique set of conditions and assumptions.

Economic systems can be categorized into four main types: 

•  Traditional economies

•  Command economies

•  Mixed economies

•  Market economies

THE TRADITIONAL ECONOMY

This is the type of economy in which the organization of production and distribution is frequently governed by tribal rules or customs.

This type existed mostly in the early stages of development, where the economy is strongly linked to the social structure of the community and people perform economic tasks for non-economic reasons.

In the traditional economy, economic matters are largely determined by social or religious customs and traditions. For example, women may plow fields because that is their customary role and not because they are good at doing so.

Traditional economic systems are often found in less developed countries, where they may be a hindrance to economic progress.

THE COMMEND ECONOMY

In the command economy, an authoritarian central government calls the tune. It operates on instructions from those in power.

In this type of economy, decisions in connection with the functions of an economic system are taken on a collective or group basis.

There is collective ownership of factors of production. The group that owns the factors of production and takes decisions may be some government body. A command economy is a centrally planned economy. There is typically very little freedom of choice.

The occupation of workers, the quantities of which type of commodity to be produced, and the distribution of income are determined by the central planners plus making arrangements for future economic growth.

Cuba, North Korea, Russia, and Iran are examples of economies that are closest to perfect command economies.

THE MARKET ECONOMY

Market is an economic system based on private ownership and the freedom of individuals to conduct their economic affairs without interference from government bodies or other groups.

Capitalist economic systems are characterized by a great deal of freedom of choice exercised by consumers and business firms in the market for commodities and resources.

The capitalist economy is also known as the free exchange economy or market economy. The essence of pure capitalism is freedom.

There is freedom to own property, freedom to buy and sell, and freedom from government interference in the economic aspect of each individual's life is best characterized by the economy of the United States, even though it is not a purely capitalist economy.

THE MIXED ECONOMY

Many economies are best described as mixtures of capitalistic and command systems. The United States and other countries where markets are heavily relied on to allocate resources and distribute output are known as mixed capitalistic systems.

The characteristics of free enterprise system are manifested in most of its economic activities. However, some of its economic decisions of the mixed economy are taken on collective basis and some of the productive resources or goods are owned by a governmental body.

In the mixed capitalistic economic system, both government and private decisions are important.

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