Economy is the wealth and resources of a country in terms of production and consumption of goods and services.
An economic system is a way in which a nation organizes, manages or controls the factors of production (resources) so that the wealth of the country is somehow distributed among its population. How these factors of production are controlled and distributed defines economic system. There are different ways for a society to organize its economy. The people might follow traditions, following the same pursuits as their parents and grandparents. The government might decide what’s right for the country or it may stay out of it, leaving the economic system to be determined by the millions of people.
Types of Economic Systems:
• Traditional economic system
• Command economic system
• Market economy
• Mixed economy
• Islamic economic system
It can be defined as an economy which is based on customs and beliefs which people get from generation to generation. In a traditional economy resources are allocated by inheritance. Some African countries (Malawi, Ivory Coast, etc) still use this system. It is also at work among Australian Aborigines and Amazon tribes.
The main advantage of this type of economic system is that it produces only those goods and services which are required for the survival or which the people want to consume. Hence there is no wastage, it does not waste resources for goods and services which are unnecessary. Also in this economy everyone knows what there job is so there is no duplication of efforts. Traditional economies are less destructive to the environment.
This type of economy resists any changes because the people tend to think that the methods which are followed by their ancestors for generations are correct and it leads to lower productivity and there is lower development of the society or the country. Also due to low productivity people have lower standards of living than those economies which do not follow traditional economic system. In this type of economy people have to do jobs which are told to do but which they don’t want to do and hence it also lowers productivity.
Command economy also known as planned economy is an economic system where the government manages all or in some cases most of the resources within the nation. Some examples of countries that use command economic system are China, Cuba, North Korea and Russsia. Socialism and communism are two types of command economic system.
In communism the government owns all the factors of production and makes all the decisions on how the resources within the nation will be used. There is a restriction on the ownership of personal property. In communism personal belongings as clothing, shoes and watches are allowed to be owned by individuals but the houses are owned by the government. In communism individuals are assigned work by the state and they are given a bit reward for their services. People get ration from government department. People do not have choice of their own. They have to be content with whatever is prescribed for them. State provides all social services such as educational, hospital facilities, etc. The classic failed example of communism was of the Soviet Union. Its collapse led to the demise of the command economies around the world.
Suppose there is an entrepreneur who comes up with an idea of opening a coffee shop, first he will have to see some land to get the business started. In communism that would not happen because governments controls the factors of production, makes all the decisions about which industry should operate. So the government would determine how factors of production get utilized, who gets the capital, how that capital is used to build certain...