Economic Systems

By: EconomyWatch   Date: 29 June 2010

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Three types of economic systems exist, each with their own drawbacks and benefits; the Market Economy, the Planned Economy and the Mixed Economy. An economic system is loosely defined as country’s plan for its services, goods produced, and the exact way in which its economic plan is carried out. In general, there are three major types of economic systems prevailing around the world.

Market Economy

In a market economy, national and state governments play a minor role. Instead, consumers and their buying decisions drive the economy. In this type of economic system, the assumptions of the market play a major role in deciding the right path for a country’s economic development. Market economies aim to reduce or eliminate entirely subsidies for a particular industry, the pre-determination of prices for different commodities, and the amount of regulation controlling different industrial sectors.

The absence of central planning is one of the major features of this economic system. Market decisions are mainly dominated by supply and demand. The role of the government in a market economy is to simply make sure that the market is stable enough to carry out its economic activities properly.

Read more about Market Economy on EconomyWatch.

Planned Economy

A planned economy is also sometimes called a command economy. The most important aspect of this type of economy is that all major decisions related to the production, distribution, commodity and service prices, are all made by the government. The planned economy is government directed, and market forces have very little say in such an economy. This type of economy lacks the kind of flexibility that is present a market economy, and because of this, the planned economy reacts slower to changes in consumer needs and fluctuating patterns of supply and demand.

On the other hand, a planned economy aims at using all available resources for developing production instead of allotting the resources for advertising or marketing.

Mixed Economy

A mixed economy combines elements of both the planned and the market economies in one cohesive system. This means that certain features from both market and planned economic systems are taken to form this type of economy. This system prevails in many countries where neither the government nor the business entities control the economic activities of that country - both sectors play an important role in the economic decision-making of the country. In a mixed economy there is flexibility in some areas and government control in others.

Mixed economies include both capitalist and socialist economic policies and often arise in societies that seek to balance a wide range of political and economic views.

Read more about Mixed Economy on EconomyWatch.

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