Types of economic systems
The way in which the relationship between producer and consumer is organized not only affects the State, but also society as a whole. In this article we share with you what an economic system is and what types of economic systems exist.
The concept of economic system
The economic system is a valid set of principles, rules and relationships that determine the form and content of the basic economic relationships that arise in the process of production, exchange, distribution and consumption of the economic product.
The purpose of the economic system is to organize the socioeconomic relations between the producer and the consumer with maximum efficiency.
The type of economic system is characterized by:
Modes of distribution of limited resources
Ways to regulate the economy
Below, we list the main types of economic systems.
Basic types of economic systems
Modern economic theory distinguishes 4 types of economic systems:
Traditional economy: It is the oldest economic system in which traditions and customs play an important role in creation, exchange and distribution. It is also one in which manual labor is widespread.
Examples of countries with traditional economies: Burundi, Bangladesh, Afghanistan.
Command economy (planned, command, state, directive): A system in which almost all economic resources are owned by the state and the economy is managed by a state plan.
Examples of countries with command economies: North Korea, Cuba, Vietnam.
Market economy is a system that is based on the principles of free enterprise, competition and contractual relationships between business entities. In a market economy, state intervention in economic activity is limited.
United States, Great Britain, Brazil, Switzerland.
Although it should be noted that there is no purely market economy in the modern world; a mixed economic system usually prevails.
Mixed economy is a system that combines elements of different economic systems. In it, the State and the private sector play an important role in the production, distribution, exchange and consumption of all resources and material goods.
Examples of mixed economies: Mexico, India, France, Japan.
Factors Affecting the Development of All Types of Economic Systems
The factors that influence economic development are:
Location. The geographical location, climatic conditions and the degree of endowment of natural resources in the area affect economic activity.
Relations with other countries. It is possible to establish friendly and/or commercial relationships or, on the contrary, conflictive ones, which will affect the way of doing business.
Level of economic development. This factor shows the current state of the economy, its macro and micro indicators.
Cultural peculiarities. Nationalities differ from each other in their way of life, traditions, mentality and religion. These differences affect people’s attitude towards work tasks, daily routines and understanding of the final result.
Characteristics of economic systems
Characteristics of traditional economies
Manual labor predominates in all sectors of the economy.
The subsistence economy is characteristic.
Slow or no development of production techniques and technologies due to contradictions with existing way of life and traditional religious and cultural patterns.
Extensive development of the exchange of goods and services without money.
Insignificant role of business.
Prevalence of traditions and customs. At the same time, the main economic issues are resolved according to them.
Joint work of economic subjects.
Religious and cultural peculiarities are of paramount importance in economic activity.
Characteristics of the command economy
All economic decisions are made by state authorities through centralized (directive) planning. That is, each company has a production plan and decides what to produce and how much to produce.
Producers cannot decide what to produce.
Producers have no interest in improving production efficiency.
State ownership of virtually all means of production prevails.
All companies are managed from a single center.
The State totally controls the production, the distribution of the products and the possibility of scarcity of basic products.
Characteristics of a market economy
Free decision of basic economic issues on the basis of the mechanism of supply and demand.
The market is buyer oriented.
Economic subjects carry out activities based on their personal economic interests.
Prevalence of private property.
Independent choice of producers, suppliers of raw materials and buyers.
The market economy develops cyclically, with ups and downs.
Limited government intervention in economic activity.
Characteristics of the mixed economy
As we have already verified, the mixed economy is so called because it combines elements of other economic systems. Now let’s see the features that characterize it:
It is often a combination of two regulatory mechanisms: the market and the government.
The presence of a private economic sector and a public one.
Combination of the motivations of private entrepreneurs with the tasks of social importance in the economy. That is, the participation of the government in the provision of social benefits.
Role of the State in a mixed economy: Provides a legal framework for the economy, encourages competition, redistributes income, reduces unemployment, reduces inflation, stimulates economic development, supports public sector companies, invests in education, health , science, culture and others.