ECONOMY
What is an economy?
Although the nature of the modern economy is extremely complex, the four types of activities, production, division, exchange, and consumption, are called ‘Economic activities’. That is why the system which is formed by the amalgamation of the institutions and associations involved in these four transactions is called ‘Economy’.
From that we can imagine the economy of a village, a city, a district, a state, a country, and the whole world.Of course, different economies appear in different countries.The natural, social, cultural, historical, political environment of that country makes a difference in the functioning of the economy. Also, economies change over time.
Types of Economies:
Economies are classified on the basis of two criteria. Depending on the ownership of the productive tools and The stage of development.
Types of economy according to ownership of productive means.
1. Capitalistic Economy
Capitalism is an economic system in which private individuals or businesses own capital goods. The production of goods and services is based on supply and demand in the general market known as a market economy rather than through central planning known as a planned economy or command economy. The purest form of capitalism is free market or laissez-faire capitalism. Here, private individuals are unrestrained. They may determine where to invest, what to produce or sell, and at which prices to exchange goods and services. The laissez-faire marketplace operates without checks or controls.
Features of a capitalist economic system
- Economic freedom. Individuals free to set up business and provide the goods and services they want.
- Consumer sovereignty. Consumers free to decide which goods and services to purchase.
- Limited government. Government intervention limited to the protection of private property and provision of public goods.
- Finance sector. Capitalism requires a developed banking and financial system which can provide loans to companies and banking services to households.
- Profit motive is seen as important for enabling an efficient distribution of resources and encouraging innovation and responsive markets.
- Market forces. Goods and services are distributed according to ‘the invisible hand of the market’ — in other words, the allocation of goods is determined by market forces. For example, if demand rises, firms have an incentive to increase supply.
- Flexible labour markets — easy to hire and fire workers.
- Free trade. Low tariff barriers to encourage international trade.
Disadvantages of a capitalist economy
- Firms can gain monopoly powers and exploit consumers.
- Firms with monopoly powers can pay low wages.
- Externalities can damage the environment.
- Tends to lead to large inequality.
- Prone to ‘Boom and Bust’ in economic cycles.
Examples of a capitalist economic system
- Hong Kong
- Singapore
- New Zealand
2. Socialist Economy
Socialist means the system under which economic system is controlled and regulated by the government so as to ensure welfare and equal opportunity to the people in a society.
The idea of socialism is first introduced by Karl Marx and Fredric Engles in their book, ‘The Communist Manifesto’.
In a purely socialist system, all legal production and distribution decisions are made by the government, and individuals rely on the state for everything from food to healthcare. The government determines the output and pricing levels of these goods and services.
Features of a Socialist Economy
- Collective Ownership: In socialism, all means of production are owned by the community, i.e., Government, and no individual can hold private property beyond certain limit. Therefore, it is government who utilises these resources in the interest of social welfare.
- Economic, Social and Political Equality: Under socialism, there is almost equality between rich and poor. There is no problem of class struggle.
- Economic Planning: Under socialism, government fixes certain objectives. In order to achieve these objectives, government adopts economic planning. All types of decisions regarding the central problems of an economy are taken in the economic plans. There is a Central Planning Authority, who plans for the economy.
- No Competition: Unlike capitalistic economy, there is no cut throat competition. It means lack of competition as state is the sole entrepreneur.
- Positive Role of Government: In socialism, government plays significant role in decision making. Thus, government has complete control over economic activities like distribution, exchange, consumption, investment and foreign trade etc.
- Work and Wages According to Ability and Needs: In socialistic economy, work is according to ability and wage according to need. It is said that under socialism “from each according to his ability to each according to his needs, is socialism.”
- Maximum Social Welfare: The sole objective of socialism is the maximum social welfare of the society. It means that there is no scope of exploitation of labour class. Government keeps a close eye on the needs of the poor masses while formulating plans.
Disadvantages of a Socialist Economy
- Loss of Consumer Sovereignty: A consumer has no choice of his own, he acts as a mere slave under this system. Government produces goods and services keeping in view the needs of the people.
- Less Democratic: Socialist economy is always less democratic as it possesses no element of freedom. It is also like government dictatorship.
- No Automatic Functioning: Under this system, no automatic function in system exists at all. It is the Central Authority, i.e., government, that governs the country according to its own interest.
- Evils of Bureaucracy: In socialist economy, all economic activities are controlled by the government. Thus, they develop all evils of bureaucracy like favouritism, delay, corruption and other sue evils
- Rigid Economy: Socialist economy is very rigid and not susceptible to change according to requirements. Hence people work like a machine and never get any incentive to work.
- Burden on Government: All the economic activities are performed by the Central Authority on behalf of the government. Hence, it is overburdened with daily activities and, therefore, it gets very less time to think and plan for the economic prosperity of the economy.
- Expenditure on Planning: In fact, planning is a long process in a socialist economy. This expenditure is unnecessarily wasteful and a burden on the national economy.
Examples of a Socialist Economy
- North Korea
- Cuba
3. Mixed Economy
A mixed economic system is a system that combines aspects of both capitalism and socialism. A mixed economic system protects private property and allows a level of economic freedom in the use of capital, but also allows for governments to interfere in economic activities in order to achieve social aims. A mixed economy has three of the following characteristics of a market economy. First, it protects private property. Second, it allows the free market and the laws of supply and demand to determine prices. Third, it is driven by the motivation of the self-interest of individuals. Most mixed economies retain characteristics of a traditional economy, but those traditions don’t guide how the economy functions. The traditions are so ingrained that the people aren’t even aware of them. For example, they still fund royal families. Others invest in hunting and fishing.
Features of a Mixed Economy
- A mixed economy has the advantages of a market economy.2 First, it distributes goods and services to where they are most needed. It allows prices to measure supply and demand.3
- Second, it rewards the most efficient producers with the highest profit. That means customers get the best value for their dollar. Third, it encourages innovation to meet customer needs more creatively, cheaply or efficiently.
- Fourth, it automatically allocates capital to the most innovative and efficient producers. They, in turn, can invest the capital in more businesses like them.
- A mixed economy also minimizes the disadvantages of a market economy.4 A market economy could neglect areas like defense, technology, and aerospace. A larger governmental role allows fast mobilization to these priority areas.
- The expanded government role also makes sure less competitive members receive care. That overcomes one of the disadvantages of a pure market economy which only rewards those who are most competitive or innovative. Those who can’t compete remain at risk.
Disadvantages of a Mixed Economy
- A mixed economy can also take on all the disadvantages of the other types of economies. It just depends on which characteristics the mixed economy emphasizes.
- For example, if the market has too much freedom, it can leave the less competitive members of society without any government support.
- Central planning of government industries also creates problems. The defense industry could become a government-subsidized monopoly or oligarchy system. That could increase the country’s debt, slowing down economic growth in the long run.
- Successful businesses can lobby the government for more subsidies and tax breaks. The government could protect the free market so much that it doesn’t regulate enough. For example, businesses that were too big to fail could be bailed out by the government if they started going bankrupt.
Example of a Mixed Economy
- India
- Iceland
- Sweden
Type of Economy according to the stage of development.
1. Developed Economy
A developed economy is an economy (country) with a high level of economic activity characterised by high per capita income or per capita gross domestic product (GDP), high level of industrialisation, developed infrastructure, technological advancement, a relatively high rank in human development, health and education.
Features of a Developed Economy
- Have a high level of per capita income or output.
- The people enjoy a higher quality standard of living.
- Contribution of industrial and service sectors are very high.
- Available resources are fully exploited and utilised.
- They have a high degree of technical development.
- They do not have a severe problem of unemployment.
- Slow growth rate of population.
- In such an economy there is a higher level of capital formation and gross domestic savings.
- They have a high ratio of urban population.
- Maximum people here live above the poverty line.
Example of Developed Economy
- United States
- United Kingdom
2. Developing Economy
A developing economy also called a less developed economy or underdeveloped country is a nation with an underdeveloped industrial base, and a low Human Development Index (HDI) relative to other countries. On the other hand, since the late 1990s developing countries tended to demonstrate higher growth rates than the developed ones. There is no universal, agreed-upon criterion for what makes a country developing versus developed and which countries fit these two categories, although there is general reference points such as a nation’s GDP per capita compared to other nations. Also, the general term less-developed economy should not be confused with the specific least developed country.
Common Characteristics of Developing Economies
- Low per capita real income is one of the most defining characteristics of developing economies. They suffer from low per capita real income level, which results in low savings and low investments.
- High Population Growth Rate. Another common characteristic of developing countries is that they either have high population growth rates or large populations.
- High Rates of Unemployment. In rural areas, unemployment suffers from large seasonal variations. However, unemployment is a more complex problem requiring policies beyond traditional fixes.
- Dependence on Primary Sector. Almost 75% of the population of low-income countries is rurally based. As income levels rise, the structure of demand changes, which leads to a rise in the manufacturing sector and then the services sector.
- Dependence on Exports of Primary Commodities. Since a significant portion of output originates from the primary sector, a large portion of exports is also from the primary sector. For example, copper accounts for two-thirds of Zambia’s exports.
Example of Developing Economy
- India
- pakistan
- Sri lanka
References :
https://www.investopedia.com/economy-4689801