Economic System Definition Types Examples What It Is

Economic System Definition

What to produce, how to produce, when to produce, how it is distributed, and which entity controls the economic processes are some of the questions to be considered to understand and interpret the design of an economic system. For example, in capitalism dominated by the free market, prices and production decisions are greatly controlled by private entities, and government intervention is minimal.

Key Takeaways

Economic systems refer to the framework the nation and its people follow to manage economic processes. It determines how activities like production, distribution, and resource allocations happen in a geographical area.The main types observed worldwide are – traditional, command, mixed, and market economies.Identifying the system followed by a region discloses how it operates within and outside its border regarding trade, income, tax rules, and growth.Examples: Bhutan is more inclined toward a traditional economic structure, North Korea reflects a command economy, Japan is a market economy, and the United States promotes a mixed economic framework.

Types of Economic System

There are different types. Let’s look into a brief description of the following types:

Traditional Economic System

It is based on and gives significance to the customs and traditions of a country’s citizens. People engage in trade or barter systems for their survival, and the production, distribution, and policies are influenced by culture. It is vastly based on agriculture. It can be majorly seen in underdeveloped and developing nations. It is also known as a subsistence economy. It is also believed that every other economy involves a history of the traditional system, and if observed closely, parts of the traditional economy can still be seen in them.

In a traditional economyTraditional EconomyA traditional economy is a system where goods production and distribution are driven by time-honored beliefs, customs, culture, and traditions. read more, societies and communities follow their ancient culture and are not dominated by technological integration. It is majorly centered around local communities and families and operates through a barter exchange. They usually export agricultural products and raw materials to developed nations in exchange for finished goods.

Command Economic System

In Command economyCommand EconomyCommand economy is a system where the government decides goods production, process, quantity, and price in a country. In this system, the government even manages income and investments. Communist nations like the former Soviet Union, Cuba, North Korea work according to this system.read more, the government or a central authority plan and control the vital processes in the economy. It doesn’t entertain other forms of the economy with the potential to pave the way for competition and the free flow of ideas. It exhibits a government system making production, consumption, and investment decisions. Hence forming a monopoly owned by the government.

Market Economic System

Minimal or no government intervention and economic processes shaped by the law of supply and demand are properties of this type. There exist free competition and free flow of ideas where entities utilize all possible opportunities, promote innovations and sell their products based on the price accepted by the consumers. Private entities can develop an appreciable level of power when functioning in this type of system. One of the examples is the individual favored capitalismCapitalismCapitalism is an economic system consisting of businesses, resources, capital goods, and labour. Private entities own it, and the income is derived by the level of production of these factors. Because of the private hands, these entities can be operated efficiently and maximize their production activity also.read more.

Mixed Economic System

A mixed economic systemMixed Economic SystemA mixed economic system is one that combines capitalist and socialist ideals. It allows for the protection of private assets while also allowing for liberty in use of capital and federal intervention in economic decisions.read more originates when a system is made of specific principles from different economic systems. It is the amalgamation of the market, traditional, and command economies. Most of the world’s economies are becoming mixed economies. It is perfect when the countries advocate for globalization. A country can identify global opportunities, export what it does best, and import what other countries produce best.

In a mixed economy, the private sector booms because the laws encourage it. Every citizen is allowed to live and earn freely. The law of supply and demand contributes significantly to the price determination process, and at the same time, the government can implement control measures like price ceiling to protect consumers.

Examples

China: It is one of the popular examples of a socialist market economy but not a pure socialist economy. There are private companies in China, but the government has the predominant role in the economy; they plan, manage and exercise direct control over the national economy.

Belarus: It is a country in Eastern Europe. Even if they state their system as market socialism, the framework resembles the properties of a command economic system where the central government owns most of the businesses and banks and controls the production and distribution of goods. Of course, there are reforms and deregulations, but still, the public sector dominates the economyEconomyAn economy comprises individuals, commercial entities, and the government involved in the production, distribution, exchange, and consumption of products and services in a society.read more, and government intervention is significant.

United States: The structure in the United States is an example of a mixed economy because encouragement for the free market and government intervention for the public good exists concurrently. Hence, reflecting the characteristics of capitalism and socialism.