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4 Types of Economic Systems

  • Ashesh Anand
  • Feb 09, 2022
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Every economy in the world is said to be one-of-a-kind in some sense. There are no two economies that are alike. These economies, on the other hand, share many of the same characteristics and attributes. As a result, economists have been able to distinguish four basic types of economies: traditional, command, market, and mixed economies. Let's take a closer look at each of these.


An economic system is a way for communities or governments to organize and distribute resources, services, and goods throughout a geographical region or country. The factors of production, such as land, capital, labor, and physical resources, are regulated by economic systems.

An economic system is made up of a variety of organizations, agencies, companies, decision-making processes, and consumption patterns that make up a community's economic structure.


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Indicators of the Economy


Economic indicators are statistics that show how well a country's economy is doing in a given area. These reports are frequently released on a regular basis by government agencies or commercial organizations, and they can have a significant impact on the stock, fixed income, and FX markets. They can also assist investors in predicting how economic conditions would affect markets and guiding investment decisions.


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Different Types of Economic Systems


The allocation of factors of production to govern the economy differs between different types of economies or marketplaces.


Consider your origins and the economics of your native land for a moment.


What are your memories of buying items and services if you grew up in a developed country like the United Kingdom, France, Germany, or China? Were there a lot of shops and stores that sold things? Was it sometimes difficult to make a decision? Was it easy to obtain services such as healthcare or housing aid, and who offered the services?


In contrast, how does spending much of your life in a developing country, such as Nigeria or Thailand, compare to living in a developed country? Is there more variety in terms of purchasing goods and services? How much power does the government have on product availability? Is access to health and social services unrestricted?


What makes a country's economy unique? The way product and service markets work is a major differentiator. Markets, as previously said, are systems for allocating scarce resources in an economy. They make it possible for consumers and producers to get the goods and services they seek. This is a classic problem that economics attempts to solve: how to ensure that individuals have access to what they require.


The macroeconomy of a country is defined by the types of markets it promotes and the number of control governments have over them, according to economic theory. This notion of an economy and a compromise position has two extremes.


As a result, there are four different sorts of economies. Each of these economies provides a response to the key scarcity question raised in earlier sections: what to create, how to produce, and for whom to produce.


  1. Mixed Systems


The characteristics of market and command economic systems are combined in mixed systems. As a result, mixed systems are often referred to as dual systems. The word is also used to characterize a market system that is heavily regulated.


A mixed system is used by many countries in the developed western hemisphere. The majority of industries are private, while the rest, largely public services, are under government control.


Globally, mixed systems are the norm. A hybrid system is said to blend the finest qualities of both market and command systems. Mixed economies, on the other hand, have the issue of establishing the correct balance between free markets and government regulation in practice. Governments have a tendency to exert far more control than is required.


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  1. Market Economic System


The principle of free markets underpins market economic systems. To put it another way, the government plays a minor role. The government has little control over resources and avoids interfering with vital economic sectors. Rather, people and the supply-demand connection are the sources of regulation.


The majority of the market economic system is theoretical. That is to say, there is no such thing as a pure market system. Why? All economic systems, after all, are subject to some form of central authority intervention. Most governments, for example, implement legislation to regulate fair trade and monopoly.


From a theoretical standpoint, a market economy allows for significant expansion. A market economic system, it is argued, produces the most growth.



  1. Economic Command System


In a command system, there is a powerful centralized authority – usually the government – in charge of a large section of the economy. The command economic system, often known as a planned system, is widespread in communist regimes since production decisions are made by the government.


If a country's economy has a lot of resources, it's likely that it'll lean toward a command economy. In this situation, the government steps in and takes control of the resources. Centralized control is ideal for valuable resources like gold or oil. Other, less essential areas of the economy, such as agriculture, are regulated by the people.


The command system works well in theory as long as the central authority exercises control in the best interests of the general people. However, this does not appear to be the case very often. In comparison to other systems, command economies are strict. 


Because authority is centralized, they react slowly to change. Because they are unable to quickly respond to changing conditions, they are prone to economic crises or emergencies.


  1. Traditional Economy


As the name implies, a traditional economy is built on a traditional method. These are the most basic types of economies, as they are founded on old norms. In a traditional economy, goods and services that correspond to their customs, beliefs, and history are prioritised.


Agriculture, cattle herding, fishing, and other traditional economies are predominantly focused on agriculture, livestock herding, and fishing. The barter system is used in a traditional economy, and there is no idea of cash or money. 


Their tribes or families are the centre of their economies. Such economies think that they should just produce what and how much they need. They don't see the point in producing any market surplus. There is no such thing as trade.


If a traditional economy does not adapt, it becomes extremely vulnerable to environmental change. As these economies develop, they begin to incorporate farming. They even exchange their surplus harvest and begin to move away from the old economy. A traditional mixed economy is created when a traditional economy interacts with a market or command economy.


Also Read | Economic Development


Watch now: Types of Economic Systems


Bottom Line


Traditional, command, market, and hybrid economic systems are the four types of economic systems. Traditional systems are affected by traditions and ideas, and they focus on the fundamentals of products, services, and work. 


A command system is influenced by a centralized authority, whereas a market system is influenced by demand and supply forces. Finally, hybrid economies combine command and market economies.


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