Types of Economic Systems and their Importance

Any country’s strength can be measured based on the performance of its economy. Different economic systems are existing in the world. In this article, we are going to discuss different types of economic systems and their importance. This is very important for competitive exams as economy sections have good weightage in any exam like UPSC, SSC, Railways, and others.

What is an Economy :

An economy is a complex system of interrelated production, consumption, and exchange activities that ultimately determine how resources are allocated among all participants.  The production, consumption, and distribution of goods and services combine to meet the needs of those who live and work in the economy. It can represent a country, a region, a single industry, or even a family.

Types of Economic Systems and Their Importance:

1. Traditional Economy :

This is an economic system based on agriculture, fishing, and hunting. It is based on traditional beliefs and ideologies. Goods and services are produced based on the employment of people. Instead of money, a barter system was used.

Characteristics of traditional economies :

In such an economy, there is a free flow of ideas, so there is a lot of innovation. Most often they work in primitive occupations such as farming, hunting, and fishing.
They are independent. This type of economic system does not deal much with trade. They consume produce and rely primarily on a barter system. In a traditional economy, when people go from hunting to farming, they try to settle and gradually form a society.

Advantages :

People are mainly engaged in traditional employment methods such as farming, fishing, and animal husbandry, which pose less of a threat to the environment. There is no waste in such an economic system as they consume what they produce.

Disadvantages :

Since the economy is based on hunting and farming, the economy is disrupted in the off-season when the weather changes. At times like this, people starve to death because they don’t have the supplies to live on.
They may still use primitive agricultural methods, but have modern occupations and are therefore not traditional economies. They can be self-sufficient.  It can refer to the Jarawa people of the Andaman Islands. They use primitive methods to survive.

 Examples: Bangladesh and Haiti

2. Command Economy :

This is the type of economic system in which the government has a monopoly on the market. It decides the production and in what quantities. The states also determine the price of goods. All laws and regulations related to the market are also set by the government. So in this economy, there is no competition as the government sets the price of everything. Governments are also responsible for allocating resources.

Important Characteristics :

This type of economic system does not depend on the law of supply and demand. Only the government determines economic laws and regulations.

Advantages :

There is no problem of inequality among citizens, Unemployment is low. Profit is not the only motivation to produce goods, as the government controls production. Since markets have no other free power, they can transform entire societies according to government economic plans.

Disadvantages :

In such an economy, innovation is scarce because there is no free flow of ideas. This type of economic system can ignore the needs of society because, in such a situation, a black market can arise that supplies goods that the economy does not produce.
The supply of goods may not meet the demand. These economies do not risk bringing anything new because their governments have their policies and guidelines.

 Examples: North Korea and Cuba 

3. Market-Driven Economy :

This is a type of economic system in which the government has no control over the market and citizens and businesses decide which goods to produce and in what quantity.  Prices are determined by the law of supply and demand. Governments can set price caps so that customers do not voluntarily charge fees. Therefore, in this economy, there is competition between companies without much government intervention.

Important Characteristics :

This is a type of economic system that relies solely on the laws of supply and demand. The law of supply and demand controls the production of goods and services.

Advantages :

In such an economy, there is a free flow of ideas, so there is a lot of innovation. Efficiency is high because there is a lot of competition in the market. it is likely to be rich as customers are willing to pay any price, so they produce goods according to the demand of their citizens.

Disadvantages :

They are facing the problem of inequality among citizens. Profit is the only motive for producing goods, as the government does not control production. Poor working conditions can be prevalent in the absence of government regulation. Unemployment is likely to rise as the government does not control the market.

Examples: the United States, Germany, and Canada.

4. Mixed Economy

It is a mix of all the above-mentioned economies i.e Governments intervene through the market, and there are also free forces. Prices are determined by the laws of supply and demand, but governments determine price caps and tax bases. So in this economy, there is competition and the government protects the interests of the people. Governments are also responsible for creating economic plans.

Important characteristics :

It is based on the law of supply and demand. The government determines laws and regulations regarding the economy. The production of goods is controlled by state agencies

Advantages :

This type of economic system has all the advantages of a market economy. Because there is a free flow of ideas, the laws of supply and demand determine pricing policy, and so is wealth creation. 

Disadvantages :

Likewise, this type of economic system has all the drawbacks of the above economies. Some of them are as if resources were wasted and can delay economic decisions if implemented in the private sector.

Examples: India and France.