Four basic types of economic system are found around the world.
Although the terminology may vary somewhat, economists generally identify four categories of economic systems: market, command/planned, mixed, and traditional. Economic decision-makers in all of these systems must face the same basic issues: identifying and allocating resources, trafficking in products and services, determining markets, and setting prices. Factors such as culture and customs, available labor force, infrastructure, political structure, and even climate and geography can play a role in determining which economic system is followed in a specific place.
Market Economy
In its pure form, a market economy, also referred to as free enterprise or capitalism, is based on supply and demand. Rather than government controlling price and production, as seen in some other economic categories, a market economy is driven by entreprenurial investment into the production of goods and by consumer demand in purchasing those goods. An entrepreneur's investment, which is necessary in this economic category, comes not only in the form of money, but also decisions to invest personal resources into training and education, plus decisions about the kind of jobs, goods, and services he decides to focus on. The United States is an example of a market economy.
Command/Planned Economy
A command economy is sometimes called a planned economy. It is often linked with a communist government. Unlike a market economy where the primary purpose of the government is to ensure adequate market stability, complete government control of the economy is at the core of the command economy system. The government determines what products to make, how they should be produced, who should produce them, where they should be marketed and at what price. A lack of flexibility in reacting to market conditions and consumer behavior is a primary drawback of this economic system. It is also difficult to keep workers motivated since a standard of living is predetermined. Cuba and the former Soviet Union are examples of command economies.
Mixed Economy
As its name suggests, a mixed economy has components of both a market economy and a command economy. It is one of the more common economic systems throughout the world. Both the market and the government play important roles in this system. Although the U.S. government plays a role in the economy, its economic system is most often identified as a market economy. Governments of a mixed economy generally are more deeply involved at the production level than is seen in the U.S. The dilemma for nations favoring a mixed economy is to determine the optimum amount of government involvement, although that balance is generally swayed to meet government objectives. Sweden is an example of a mixed economy.
Traditional Economy
A traditional economy is often overlooked in discussions of economic systems. Few countries strictly follow a traditional economy. Those countries that have followed such a system have begun making strides toward a mixed, command. or market system. Traditional economic systems center on agrarian practices and, as its name implies, decisions regarding what services and products are produced, and how they are marketed, are based on historic practices or traditions. Resources are often allocated according to inherited rights. Despite its seemingly antiquated features, a traditional economy carries some benefits. Workers feel more secure, resulting in greater work capacity and lowered unemployment rates. There is movement to more contemporary economic concepts among nations with traditional economies today. The traditional economy approach can still be seen among Australian aborigines and some remote tribes in the Amazon. The concept continues to play a major role in the economic systems of Papua New Guinea and other developing nations in Africa, Asia, and South America.
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