Saturday, 11 March 2017

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Economy and Types of Economies Explained | Traditional, Planned, Market and Mixed

An economy is a system of organization or institution that plays a key role in the production & distribution of goods and services in a society. It manages the resources of the country against the needs and wants of the people. Since, resources, specially, the natural ones are unevenly distributed in the world, therefore, every nation needs to use these resources judiciously. But, how does every nation manages these resources? Or, do all the countries manages such resources in the same way? We shall get answer to these questions as we move further.

An economy is the production and consumption activities that determines how scare resources are allocated among different sectors of a society. An economy exists to satisfy the needs of both- the producers and the consumers. The producers needs money and the consumers’ needs goods and services. But, who determines what needs to be produced in an economy and who shall decide the price of such products?

The kind of economy in a country decides which products shall be produced in a country and the rate at which such goods and services shall be supplied. The economic system of a country means the system by which goods and services are distributed in the country along with other resources available in that particular country.
Basically, there are four types of economic system – Traditional, Planned, Market and Mixed economy. Let’s understand all of them in brief.

Traditional Economy

Like the name, a traditional economy is the tradition and customs driven economy. It is one of the oldest and now, the rarest kind of economies found. How the factors of production shall be used, how the goods shall be traded is purely dependent upon the long traditional patterns of that country. Here, the customs are given priority over practical trading method. The new generations, too, follow the old traditional patterns of their ancestors. The business moves in this economy is highly predictable, since people are aware of the customs. There is low growth of businesses and also, less financial gains. Here, basic occupations include farming, hunting, fishing etc.
Northern Canada is a good example of traditional economy.

Planned Economy

A planned economy is one in which a government decides how the factors of production are used. Here, government has complete control on trade of goods and services. In planned economy, the government decides who owns the businesses, who sells to whom and who takes major decisions regarding businesses. Planned economy is also called command economy. COMMUNISM an example of planned economy.

Let us see what Communism is 

Communism is a planned economy where all means of production i.e. land, labor, capital, entrepreneurs are controlled by central state authority. In such economy, an individual cannot possess his own land. An individual, in such economy, is allowed to own his personal belongings only like car, television, clothes etc. but, not land!  In such economy, government takes all major business decisions. Not only this, but whether you are going to college or which course you study, is controlled by government. Presently, countries like China and North Korea are communist countries.

Market Economy

Market economy is the consumer-based economy. Here, people of the country choose how the factors of production shall be utilized for production of goods and services. Market economy is influenced by the consumers of the country. People in this economy has free choices to make. They decide what goods shall be produced, which services will be rendered. They choose from whom they buy, to whom they sold, for whom they work, what business they own and operate. The businessmen also decide which techniques they must adopt for the production of goods and services, whether labor intensive or capital intensive. Prices for goods and services are decided by market forces of demand and supply. Government doesn’t control prices of goods, rather, consumers influence such price making decisions.

For example- If demand of a product is high, and supply is less, then price of the product is expected to rise. In contrast, if goods are less demanded but, are adequately supplied in market, its price is expected to be low.

Market economy is also called capitalist economy, since all major decisions are taken by private individuals. There is less of government intervention. In market, economy, consumers are given priority as a result, it leads to better quality products, low prices of goods to survive in competition. Producers, here, tries to earn maximum profit by expending heavily on publicity and advertising of products. Government, in such economy, tries to stabilize the economy and secures the country from internal and external threats.
Countries like Unit Australia, and Hong Kong are true example of market economies.

Mixed Economy

In Mixed Economy, as the name suggests, is the combination of two or more economies. In lay man’s term, mixed economy is the combination of planned (command) economy and market economy. A country where entire resources are neither controlled by government nor entirely controlled by private individuals, such economies are so prescribed as mixed economy. In mixed economy, control on resources of the country along with major business decisions is jointly shared by both government as well as private players. Few resources or industries for certain reasons are solely controlled by government whereas other sectors of economy are set free for private players to work on. Here, few resources are allocated by market and few by government.

Mixed economies protect private interests. People in mixed economy are allowed to own private properties. Also, prices of goods are determined through market forces of demand and supply. Here, government also safeguard people and the market. Major decisions related to state (country) are taken by government. Areas like defense, international trade, health & welfare, national transportation are controlled by government. Countries like India, United States of America are examples of mixed economy.

So these were few types of economies that are currently prevalent in the world. We hope you liked the article, stay tuned for more! 


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